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overview
Fortinet is one of the big names in the industry, along with Cisco Systems, Palo Alto Networks and Checkpoint Software. The largely US-dominated industry follows exponential dynamics as demand is strong and looks to be insatiable for years to come. Expected to exceed $200 billion, there are now many opportunities for expansion.
Gartner Network Firewall and SD-WAN Magic Quadrant Leader
Source: Gartner
The cybersecurity company is the global leader in software-defined wide area network network firewalls and SD-WAN, touted as the most relevant solutions of the next decade. The company offers a wide range of solutions through its FortiOS Everywhere cloud-based platform. Customers pay subscription fees to access various IT security services. This ensures a continuous and scalable revenue stream. In fact, as your customer’s business grows, they need to purchase new options to support their needs.
Convergence of network and IT security around FortiOS everywhere
Source: Fortinet
Fortinet’s dominant position in this space alongside Palo Alto Networks means it benefits from scale effects and is somewhat insulated from the inherent obsolescence risk of the technology compartment. When competitors with superior solutions emerge, industry leaders are well positioned to buy them and compete.
Fortinet is preparing for industry consolidation. Many businesses are unprofitable and could suffer from a possible recession in 2023. This is a boon to his Fortinet who has enough cash to shop in the market and solidify his position as an industry leader.
A highly fragmented industry ready for consolidation
Source: Fortinet
But it’s worth noting, and Fortinet continues to focus on organic development. Since 2017, 90% of the innovation budget has been spent on R&D and only 10% of his on acquisitions. In fact, the company has repurchased 192 million of his shares since 2017 for a total of $4.6 billion, reducing the number of shares outstanding and boosting the stock price, thereby increasing the return on investment (ROI) for shareholders. I was.
Strategic investment and capital allocation
Source: Fortinet
financial analysis
Fortinet is growing twice as fast as the market, growing at an annual rate of 22.6% over the past decade (compared to 11% for the cybersecurity market).
graph of income statement evolution
Source: MarketScreener
Three-quarters of the company’s revenue is generated outside the United States and its client portfolio is diversified and balanced between large multinationals and midsize companies. Sales of services (which are more profitable than sales of products) account for two-thirds of revenue, and management expects growth in the next few years. As for contracts, the renewal rate is satisfactory and the average term is generally 2-3 years (typical of IT consulting). It’s important to note that IT consulting is generally less entrenched than auditing. For example, because the latter sector is fully consolidated among the “Big 4”. In the IT field, competition is becoming more intense and diverse.
Fortinet’s edge over its competitors is profitability, with an average operating margin of over 20% since 2009, making it one of the most profitable companies in the space. Our free cash flow (FCF) margin has averaged over 32% over the past five years. Another piece of good news that sets us apart from our competitors is that over the past decade, Palo Alto Networks and Crowdstrike share numbers have remained stable between 819 million and 836 million, while Palo Alto Networks and Crowdstrike have , a quintuple following a capital increase and a large amount of equity. Base Executive Compensation Program.
Graph showing operating margin and revenue growth for key competitors over the last year (2021-2022)
Source: Fortinet
Fortinet turns out to be the most profitable company among its direct competitors.
Let’s take a look at the “Rule of 40”. The principle is that if a company’s growth rate plus the software industry’s operating margin is over 40%, we are dealing with a quality company that is likely to perform. future. Fortinet has performed admirably since 2009, with scores near or above 40%.
40 rules that apply to Fortinet
Source: Fortinet
We have a good balance sheet, very little debt, and plenty of cash. It is a low capital intensive business that does not require working capital as the customer pays upfront with his SaaS (Software as a Service) model.
balance sheet graph
Source: MarketScreener
Stock holding and valuation
The company was founded by Ken Xie and his brother Michael, who still hold 16% of the capital together. Ken Vie is an American billionaire of Chinese origin, known for selling his first company, NetScreen, to Juniper Networks in 2014 for his massive $4 billion.
He is also the true “prince” of Silicon Valley’s aristocratic group. His daughter Jaime is a model, businesswoman, and showbiz star (and a fixture in the Netflix show Bring Her Empire). The former equestrian champion rode with Eve Jobs, the daughter of Apple’s founder.
List of major shareholders
Source: MarketScreener
Key insiders are pretty sell-off from 2022 onwards, even if the positions are still very large. So you may have to wait patiently before rushing to stock. Starting to build stock around $42-43 seems like an interesting entry point. This is confirmed given the Fed’s hawkish policy trajectory, which is currently (early 2023) putting pressure on the prices of high P/E stocks like Fortinet. The company is currently valued at 42x its projected earnings in 2023 and 7x earnings, but its FCF yield is very comfortable at his 5.34%, which is pretty reasonable given the company’s quality and growth.
price chart
Source: MarketScreener
Fortinet has established itself as a leader that will maintain its position for years to come. The Group is preparing for future sector consolidation. Its track record will certainly enable it to consolidate its leadership position and establish itself in the global cybereconomic fabric.
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