Unified SASE And AI Focus Will Expand Future Cybersecurity Services, Tapping Into SMB Momentum

Key Takeaways

• Unified SASE and AI-driven security operations promise significant revenue growth and improved net margins through enhanced market adoption and operational efficiencies.
  
• Acquisitions and targeted upsell opportunities in cybersecurity and firewall solutions are anticipated to drive further revenue growth, especially in SMB segments.
  
• Fortinet's growth depends on successfully upselling existing customers, navigating regulatory hurdles, and managing geopolitical tensions, alongside integration success from recent acquisitions.

Catalysts

Provides cybersecurity and convergence of networking and security solutions worldwide.

• The implementation of Unified SASE is expected to drive significant future revenue growth due to its integration of key SASE functionalities and its strong market adoption, which could increase total revenue and secure operations revenue significantly.
  
• Fortinet's focus on AI-driven security operations and management is anticipated to lead to improved net margins by enhancing operating efficiencies and reducing costs related to security management across distributed environments.
  
• The acquisition of Perception Point is set to expand Fortinet's cybersecurity offerings beyond email to the entire workspace, potentially boosting service revenue as it taps into the growing demand for comprehensive security solutions.
  
• The planned substantial upsell opportunity from the 2026 and 2027 firewall upgrade cycles is likely to increase product revenue, given the early purchases by large enterprises, which also positions Fortinet for higher cross-selling of SASE and SecOps solutions.
  
• Fortinet's strong momentum in the SMB segment, driven by a mature channel program and targeted incentives, is expected to boost product and service revenues as these smaller businesses look to fortify their network defenses.

Fortinet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fortinet's revenue will grow by 14.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.3% today to 25.6% in 3 years time.
• Analysts expect earnings to reach $2.3 billion (and earnings per share of $3.07) by about March 2028, up from $1.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.6 billion in earnings, and the most bearish expecting $1.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.9x on those 2028 earnings, up from 42.7x today. This future PE is greater than the current PE for the US Software industry at 28.2x.
• Analysts expect the number of shares outstanding to grow by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.42%, as per the Simply Wall St company report.

Fortinet Future Earnings Per Share Growth

Risks

• Fortinet's optimistic growth and expansion projections rely heavily on the successful refresh and upsell of their existing customer base, particularly around the end-of-life hardware upgrade cycle. If these targets are not met, it could negatively affect revenue growth projections.
  
• Despite strong current performance, the company anticipates moderate product growth given the complex regulatory and competitive environment, which could hinder meeting their ambitious revenue and earnings targets.
  
• Potential tariff impacts and geopolitical tensions could negatively affect Fortinet's billing and sales especially in regions like Latin America and Canada, leading to challenges in achieving expected revenue and profit margins.
  
• The forecasted growth from recent acquisitions adds complexity and uncertainty, since any integration issues or underperformance could negatively affect net margins and earnings per share.
  
• The emphasis on the Unified SASE strategy entails execution risks as the company transitions existing firewall customers to this new platform, requiring significant cross-selling success to meet projected service revenue growth and maintain profitability.

Valuation

• The analysts have a consensus price target of $114.777 for Fortinet based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $135.0, and the most bearish reporting a price target of just $83.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.9 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 48.9x, assuming you use a discount rate of 7.4%.
• Given the current share price of $96.91, the analyst price target of $114.78 is 15.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.