Fortinet, Inc. (NASDAQ:FTNT): Can Growth Justify Its May Share Price?

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Growth expectations for Fortinet, Inc. (NASDAQ:FTNT) are high, but many investors are starting to ask whether its last close at $77.74 can still be rationalized by the future potential. Below I will be talking through a basic metric which will help answer this question.

Check out our latest analysis for Fortinet

Can we expect FTNT to keep growing?

According to the analysts covering the company, the following few years should bring about good growth prospects for Fortinet. Expectations from 27 analysts are buoyant with earnings forecasted to rise significantly from today’s level of $2.059 to $2.186 over the next three years. This results in an annual growth rate of 11%, on average, which indicates a solid future in the near term.

Can FTNT’s share price be justified by its earnings growth?

As Warren Buffett’s right-hand man Charlie Munger said, “No matter how wonderful a business is, it’s not worth an infinite price.” Fortinet is available at price-to-earnings ratio of 37.76x, showing us it is overvalued compared to the US market average ratio of 17.45x , and undervalued based on its latest annual earnings update compared to the Software average of 52.64x .

NasdaqGS:FTNT Price Estimation Relative to Market, May 28th 2019
NasdaqGS:FTNT Price Estimation Relative to Market, May 28th 2019

Fortinet’s price-to-earnings ratio stands at 37.76x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. However, since Fortinet is a high-growth stock, we must also account for its earnings growth by using calculation called the PEG ratio. A PE ratio of 37.76x and expected year-on-year earnings growth of 11% give Fortinet a quite high PEG ratio of 3.5x. This tells us that when we include its growth in our analysis Fortinet’s stock can be considered overvalued , based on fundamental analysis.

What this means for you:

FTNT’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are FTNT’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has FTNT been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of FTNT’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.