Updates - Fortinet – Multiple Secular Tailwinds & Significant Relative Mispricing
We expect more to come from FTNT due to structural tailwinds and underappreciated visionary management.
Executive Summary
General heightened awareness of cybercrime and calls to action continues but the knowledge regarding ransomware prevention is still really limited – a great tailwind for FTNT.
The growing concerns regarding security + productivity as companies adopt hybrid work models can be addressed with FTNT’s Zero Trust and SD-WAN all-in-one solution.
SPs continue to be a significant customer segment for FTNT as they prepare their networks for the next evolution of connectivity. And they are still very early in this journey.
Less modernized verticals undergoing digital transformation need to consider their Operational Technology security – and they are turning to FTNT to help them.
FTNT’s Rule of 40 is in the top 4% but its fwd EV/FCF is in the bottom 8% and the DCF valuation indicates FTNT is trading at a 20%-30% discount.
Contents
Article 1
Heightened Awareness & Call to Action
Hybrid Environments
Article 2
Intelligent Connectivity
Operational Technology [OT]
Valuation Considerations
Summary
FTNT is benefitting from multiple secular tailwinds – general heightened cybercrime awareness and calls to action, hybrid developments, the connectivity evolution, and OT security needs. FTNT’s ability to fortify company-wide security amid distributed infrastructures, enhance productivity, deliver the highest security ROI, provide solution consolidation, and its long-standing exemplary reputation, is making it a prime beneficiary of these secular trends.
In addition to the top-down investment case, there is a significant relative mispricing reflecting a large discrepancy between FTNT’s quality and the market’s perception. Moreover, the DCF also indicates a 20%-30% discount to intrinsic value. Given the tailwinds, the business quality, the valuation considerations, and the share buyback program [recently increased by $1.25bn], we’re still long-term bullish and will be happy to add more shares on corrections.
Figure 1 - Top-Down Investment Case for FTNT
Source: Convequity
Heightened Awareness & Call to Action
SolarWinds Response
The SolarWinds data breach unveiled in December 2020, was an historic point in cybersecurity that generated a new wave of awareness [and cybercrime] across the corporate world. It highlighted the growing sophistication of bad actors, that we discussed in Why We Believe SentinelOne is Better than Crowdstrike [the paragraph after Figure 9], and emphasized the need to reassess security defenses and overall security posture.
In the ATI exclusive, Palo Alto Networks: Significant Mispricing, we published in April 2021, we postulated a typical corporate timeline for a full response to the SolarWinds attack [the malware is actually called Sunburst]. We anticipated that vendors, especially broad-based platform vendors like PANW and FTNT, would see the fruits of the security overhauls in Q3 and Q4 of 2021. And for both of these cybersecurity giants that scenario has materialized as growth has recently accelerated – PANW’s 1Q22 [quarter end 31st Oct] generated 32% YoY