Leveraging SASE Expansion And AI Tech To Propel Market Dominance And Revenue Surge

Key Takeaways

• Expansion into Unified SASE and Secure Operation markets, alongside strategic acquisitions, positions Fortinet for potential revenue growth and market share increase.
  
• Fortinet's development of SASE delivery infrastructure and acquisition of Next DLP could reduce costs and open new revenue streams, improving competitive stance.
  
• Fortinet faces challenges including potential slow product revenue growth, risks from market reliance, acquisition integration costs, dependency on service revenue, and execution risks in new market initiatives.

Catalysts

Provides cybersecurity and convergence of networking and security solutions worldwide.

• The expansion into the fast-growing Unified SASE (Secure Access Service Edge) and Secure Operation markets represents a significant growth opportunity. Investments and acquisitions in these areas could enhance product offerings and customer base, potentially increasing revenue growth and market share.
  
• Fortinet's development of its own SASE delivery infrastructure, leveraging FortiGate technologies, provides a long-term cost advantage. This strategic positioning could reduce operating costs and improve net margins over time.
  
• The acquisition of Next DLP, a cloud-native SaaS data protection platform, allows Fortinet to enter and potentially dominate the stand-alone enterprise Data Loss Prevention market. This move could open up new revenue streams and improve the competitive positioning in the SASE solution market.
  
• Fortinet's leading position in multiple Gartner Magic Quadrants, backed by its unified operating system, FortiOS, with AI-powered FortiGuard secure services, highlights its innovation and could enhance its brand and product appeal, driving revenue growth.
  
• Investments in the cybersecurity for OT (Operational Technology) segment, including product enhancements and strategic partnerships, could tap into the growing demand for OT security, contributing to revenue diversification and growth.

Assumptions

• Analysts are assuming Fortinet's revenue will grow by 13.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.7% today to 22.4% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $2.42) by about August 2027, up from $1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.0x on those 2027 earnings, down from 43.5x today. This future PE is lower than the current PE for the US Software industry at 36.0x.
• Analysts expect the number of shares outstanding to decline by 2.6% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.64%, as per the Simply Wall St company report.

Risks

• The potential delay in the firewall refresh cycle until 2025 could lead to slower product revenue growth in the near term, impacting overall revenue growth expectations.
  
• High reliance on the secure networking market for growth amidst shifting networking and security convergence trends could miss revenue projections if market adoption slows or deviates from expectations.
  
• Investments in acquisitions, such as Lacework and Next DLP, introduce integration risks and upfront costs that could pressure operating margins and cash flow in the short term.
  
• A significant portion of revenue growth and margin improvement is attributed to the service segment; any slowdown in service revenue growth could disproportionately impact total revenue and profit margins.
  
• The company's aggressive push into the Unified SASE and SecOps markets, while strategic, carries execution risk and could lead to increased spending without a corresponding short-term increase in revenue, affecting net margins and earnings.

Valuation

• The analysts have a consensus price target of $72.72 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 $90.14, and the most bearish reporting a price target of just $59.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $8.2 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 34.0x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $74.72, the analyst's price target of $72.72 is 2.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.