Fortinet Is a Cybersecurity Play Delivering Huge Free Cash Flow
The ongoing cybersecurity threats from both domestic and foreign players will likely only accelerate as bandwidth speeds move toward 5G and the globe becomes even more interconnected.
In this space, a fantastic large-cap play on cyberattack protection is Fortinet Inc (NASDAQ:FTNT). The company has been generating impressive revenue and profit growth, along with truckloads of free cash flow (FCF).
Fortinet has been around for nearly two decades, developing advanced integrated cybersecurity solutions to protect critical information technology assets. The company has developed a broad user base worldwide of over 290,000 companies, including the majority of the Fortune 500.
FTNT stock is currently trading at the midpoint of its 52-week range of $64.41 to $96.96, up a mere 0.44% over the past year, in line with the Nasdaq and slightly trailing the S&P 500.
Chart courtesy of StockCharts.com
My Bull Thesis for FTNT Stock
As I previously said, Fortinet Inc is a beast in delivering strong fundamental growth. From 2014 to 2018, Fortinet managed to increase its revenues in the past four straight years, with revenues more than doubling from 2014, powered by strategic acquisitions along the way.
The compound annual growth rate was a healthy 23.6% during this time frame.
|Fiscal Year||Revenue (Billions)||Growth|
(Source: “Fortinet Inc.” MarketWatch, last accessed August 23, 2019.)
The company’s expected revenue growth rate is estimated to moderate to 17.2% (to $2.1 billion) in 2019, followed by 13.5% (to $2.4 billion) in 2020. (Source: “Fortinet, Inc. (FTNT),” Yahoo! Finance, last accessed August 23, 2019.)
At the same time, Fortinet has been ramping up its earnings before interest, taxes, depreciation, and amortization (EBITDA) and its profitability—on both a generally accepted accounting principles (GAAP) and adjusted basis.
Its EBITDA exploded in the last three straight years, as the below table shows.
(Source: MarketWatch, op cit.)
Fortinet also massively grew its GAAP diluted earnings per share (EPS) in the past few years.
|Fiscal Year||GAAP Diluted EPS||Growth|
Another bullish sign is that the company’s earnings estimates for both 2019 and 2020 have risen over the past 90 days. On an adjusted basis, FTNT is expected to generate profits of $2.24 per diluted share in 2019, up from $1.84 in 2018, and follow that with $2.48 per diluted share in 2020. (Source: Yahoo! Finance, op cit.)
Fortinet has beaten the consensus EPS estimates in four consecutive quarters, so we could see another beat this year.
The company has also consistently produced positive FCF, marked by four straight years of growth. Its FCF has more than tripled from 2014 to 2018.
|Fiscal Year||Free Cash Flow||Growth|
(Source: MarketWatch, op cit.)
Fortinet has a mere $37.5 million in debt on its balance sheet, while holding a war chest of $1.8 billion in cash. This will afford the company financial flexibility. (Source: Yahoo! Finance, op cit.)
At first glance, FTNT stock is not cheap, trading at 32.6 times its 2020 consensus EPS and having a price/earnings to growth ratio of 2.02.
But Fortinet stock deserves a premium multiple, given its expected earnings growth and the bullish outlook for the cybersecurity sector.