To The Moon

1. Executive Summary

1.1. Introduction

Fortinet is a cybersecurity company based in California and founded in 2000. Since then, it provides cybersecurity solutions for over 750,000 customers worldwide. I believe what makes Fortinet a good investment includes its products that are attractively-priced and effective, its integrated solutions that make cybersecurity management much easier, its potential through adapting to changes in the cybersecurity landscape alongside strong demand in the cybersecurity market.

1.2. Key Financials

Fortinet has shown consistent improvement in its profitability margins. Its ROIC has also been improving consistently, meaning it has been able effectively invest for growth. However, its debt to equity ratio has been decreasing and became negative in 2023. Nevertheless, it has a strong cash balance of ~2 billion as of 1Q24, and a steadily increasing interest coverage ratio, significantly lowering their risk of insolvency.

1. Company Overview

2.1. Secure Networking

Facilitates safe networking through converging networking and security via their their network firewall.

FortiOS is their networking and security operating system consistent across their firewall that can be physical, virtual, cloud or Software as a Service. Their proprietary Application-Specific Integrated Circuits (ASIC) technology that combines with off-the-shelf central processing units (CPUs) elevates the performance of their systems.

FortiOS can improve the security management of organisations using different types of firewalls:

Other key products include FortiSwitch and Fortilink, which enables the ethernet to become an extension of a company’s security infrastructure. Additionally, their wireless local area network (LAN) solution leverages secure networking to provide secure wireless access.

2.2. Unified Secure Access Service Edge (SASE)

The Fortinet Unified SASE solution is a single-vendor SASE solution that addresses the need for secure cloud access as applications migrate to the cloud and remote work becomes prevalent.

Including various products such as Firewall, Software-Defined Wide Area Network and Secure Web Gateway, they are delivered through their FortiOS operating systems. All functions can be managed through a unified management console.

2.3 Security Operations

Their Security Operations solutions automates detection and response to accelerate the discovery and remediation of security incidents. It complies with the National Institute of Standards and Technology (NIST) framework, by the US Department of Commerce, which aims to help organisations reduce cybersecurity risks.

Products include FortiAi, FortiSIEM and FortiSOAR. Main services would include Fortiguard Security Services and FortiCare Technical Support Service. They earn revenue through the sale or renewal of subscriptions and contracts, which is usually deferred and recognised late, with a service period of 1 to 5 years.

2.4. Business Model

Fortinet usually sells their security solutions to distributors that sell to networking security focused resellers and various service providers, who sell to end-customers or use the products to provide hosted solutions to other enterprises.

It also sells software licenses and services directly and indirectly through its channel partners, via different cloud service provider platforms.

Its end customers are in over 100 countries, including small, medium and large enterprises and government organisations across a wide range of industries, such as financial services and healthcare. Each customer may require from one to thousands of products deployed.

It also offers products hosted in its own facilities, co-locations and major cloud service providers.

Secure networking is forecasted to grow at a 8% CAGR from 2024 to 2028.

Unified SASE is forecasted to grow at an 8% CAGR from 2024 to 2028.

Security operations is forecasted to grow at a 13% CAGR from 2024 to 2028.

Fortinet’s services seem to be driving its revenue growth steadily, despite a decline in product revenue. Its services revenue enjoyed strength in its security subscription revenue which grew 33%.

It is diversified globally, and generate a large part of revenue from outside the US.

1. Industry Outlook

According to the International Monetary Fund, cyberattacks have more than doubled since the pandemic. Check Point Research observed a 28% qoq increase in the average number of cyber-attacks per organisation in 1Q24.

A Deloitte report states that cybersecurity attacks were mainly experiences in EMEA, followed by the Americas and then APAC. APAC was the regional spend leader in 2023, providing for even greater revenue generating potential in the other affected regions.

Additionally, there is an ongoing challenge of attracting and retaining cybersecurity professionals. Gartner predicts that a lack of talent will be responsible for half of cybersecurity incidents by 2025. A study by Criticalstart in 2023 found that 93% of organisations plan to offload some aspect of cyber risk reduction to security risk providers in the next to years.

With more connected devices, applications and online services, there would be more vulnerabilities and hence opportunities for cyberattacks. Attacks are also being carried out faster, with the average number of days taken to execute an attack dropping from about 60 days in 2019 to just 4 in 2023. Threat actors are adopting the power of AI to adapt to and create new types of randomware.

As such, demand for AI-based cybersecurity products will increase to about $135 billion by 2030, according to Acumen Research. The current traditional security measures are limited, for instance delays in analysing exploits until systems are updated, inability for scalability and the need for manual monitoring and testing.

1. Competitor Analysis

Main competitors of Fortinet are:

• Palo Alto Networks: A leader in cybersecurity. Some products include A Next-Generation Firewall (NGFW), Threat Intelligence Management and a SASE solution. It has many best-in-class security products with extensive features.

• Zscaler: Provides solutions to address cyber threats, data protection and integration. It is a leader in Zero Trust and allows customers to securely take advantage of the cloud. Key products include its Secure Internet Access gateway, Secure Private Access and Digital Experience.

• CrowdStrike: Provides solutions to protect organisations from cyberthreats. Its main product the Falcon Platform is designed for cybersecurity consolidation, built with AI to harness data to stop breaches. Additionally, Falcon does proactive threat hunting.

• CheckPoint Software: It provides cybersecurity solutions dedicated for corporate enterprises and governments. It provides an AI-powered, Cloud-driven Check Point Infinity Platform which allows comprehensive, consolidated and collaborative security.

Compared to its peers, Fortinet’s EV/EBITDA is below the median, which might mean it is undervalued. Its ROIC is above the median, which might mean it is more effective in utilising its capital than its peers. Its EPS is at the median, which suggests similar profitability as its peers. Its P/E ratio is much lower than its peers, which might signal a severe undervaluation. Lastly, its PEG is average and healthy.

1. Investment Thesis

6.1. Cost Effective Scalability

Fortinet offers one of the most cost effective solutions in the market, being an attractive choice to meet security needs without complex features. Compared to the market leader by market capitalisation Palo Alto Networks, reviews mention its cheaper price - its next-generation firewall costs about $900/month vs about $1400/month; and $3.56/Mbps compared to $29.25/Mbps respectively according to eSecurity Planet. Additionally, it has a much easier deployment and set up and also has a higher security effectiveness rate compared to Palo Alto.

As such, as the demand for cybersecurity increases and companies start to utilise such products, Fortinet would be a better choice for those companies just starting out and not requiring overly complex features, which would usually be smaller companies with lower budgets.

Together with Fortinet’s focus on scalability utilising its proprietary ASICS and off the shelf CPUs, it would allow companies to scale their systems easily.

6.2. Integrated Solution Positioned to Tackle the Cybersecurity Job Gap

Fortinet offers a unique integrated SASE solution for easier operability, whereby it simplifies the management of security across applications, users, locations and more.

Additionally, the incorporation of generative AI capabilities to its network operations center and security operations center tools will help make decision making and analysis easier. FortiAI on FortiManager automates complex tasks and allows IT teams with minimal coding experience to make informed decisions, helping combat the cyber security skills shortage and making Fortinet an ideal choice for organisations.

6.3. Positive Industry Outlook

Fortinet projected $6500 million in billings for 2024, an increase from $6400 in 2023 and a CAGR of 20% from 2020-2024. Additionally, it is looking to penetrate the large enterprise market and take on larger customers, having signed 13 deals valued at >$10 million in 2023, up from single-digit counts of such deals in previous years and ~2.7x of 2022. This is as its top competitor Palo Alto saw its number of accounts valued at >$10 million increase just 28% yoy.

Also, Fortinet is a leader in the emerging computer networking technology, targeted software-defined wide area networks (SD-WANs). SD-WANs is based on software to manage the wide area network and is cheaper, faster and more scalable. The demand for SD-WANs is increasing due to the increase in hybrid work models.

*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk.