Dj Fortinet Inc. Stock Underperforms Wednesday When Compared To Competitors

Investors seek growth stocks to capitalize on above-average growth in financials that help these securities grab the market's attention and produce exceptional returns. But finding a growth stock that can live up to its true potential can be a tough task.

By their very nature, these stocks carry above-average risk and volatility. Moreover, if a company's growth story is over or nearing its end, betting on it could lead to significant loss.

However, the task of finding cutting-edge growth stocks is made easy with the help of the Zacks Growth Style Score (part of the Zacks Style Scores system), which looks beyond the traditional growth attributes to analyze a company's real growth prospects.

Fortinet (FTNT) is on the list of such stocks currently recommended by our proprietary system. In addition to a favorable Growth Score, it carries a top Zacks Rank.

Research shows that stocks carrying the best growth features consistently beat the market. And returns are even better for stocks that possess the combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy).

While there are numerous reasons why the stock of this network security company is a great growth pick right now, we have highlighted three of the most important factors below:

Earnings Growth

Arguably nothing is more important than earnings growth, as surging profit levels is what most investors are after. For growth investors, double-digit earnings growth is highly preferable, as it is often perceived as an indication of strong prospects (and stock price gains) for the company under consideration.

While the historical EPS growth rate for Fortinet is 42%, investors should actually focus on the projected growth. The company's EPS is expected to grow 33.5% this year, crushing the industry average, which calls for EPS growth of 31.2%.

Cash Flow Growth

While cash is the lifeblood of any business, higher-than-average cash flow growth is more important and beneficial for growth-oriented companies than for mature companies. That's because, growth in cash flow enables these companies to expand their businesses without depending on expensive outside funds.

Right now, year-over-year cash flow growth for Fortinet is 34.6%, which is higher than many of its peers. In fact, the rate compares to the industry average of -12.9%.

While investors should actually consider the current cash flow growth, it's worth taking a look at the historical rate too for putting the current reading into proper perspective. The company's annualized cash flow growth rate has been 34.5% over the past 3-5 years versus the industry average of 15.2%.

Promising Earnings Estimate Revisions

Superiority of a stock in terms of the metrics outlined above can be further validated by looking at the trend in earnings estimate revisions. A positive trend is of course favorable here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

There have been upward revisions in current-year earnings estimates for Fortinet. The Zacks Consensus Estimate for the current year has surged 8.3% over the past month.

Bottom Line

While the overall earnings estimate revisions have made Fortinet a Zacks Rank #1 stock, it has earned itself a Growth Score of B based on a number of factors, including the ones discussed above.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

This combination positions Fortinet well for outperformance, so growth investors may want to bet on it.

Zacks Investment Research

Fortinet's FTNT impressive third-quarter 2024 results have sparked renewed investor interest, with the stock surging 18.5% post-earnings. The cybersecurity giant demonstrated remarkable financial discipline, achieving record gross margin and operating margin, with the latter increasing 830 basis points to more than 36%. Total revenue growth of 13% marks a significant milestone as the company returns to positive billings and product revenue growth.

Fortinet reported third-quarter 2024 non-GAAP earnings per share (EPS) of 63 cents, which beat the Zacks Consensus Estimate by 23.53%. The bottom line climbed 53.7% from the year-ago quarter’s earnings of 41 cents.

Post Earnings Share Price Movement

Market Leadership in Unified Security Solutions

Fortinet is the only vendor offering all Secure Access Service Edge (SASE) functions in a single operating system and providing a unified networking and security stack on-premise and in the cloud. This allows FortiSASE to be deployed within minutes for our SD-WAN customers. The company's proprietary FortiASIC technology delivers 5-10x better performance than competitors while reducing the total cost of ownership and energy consumption – a compelling proposition for customers seeking efficiency and sustainability.

SASE and Security Operations Drive Growth

The company's Unified SASE business now represents 23% of total billings, showing strong momentum with security service edge billings growth of 220% and pipeline growth of 130%. Security Operations emerged as the fastest-growing pillar with 32% billings growth, now accounting for 10.5% of total business. These growth vectors demonstrate Fortinet's successful expansion beyond its traditional networking security roots.

Larger enterprises continued to drive expansion into Unified SASE and SecOps markets, with large and mid-enterprises representing 91% and 76% of SASE and SecOps billings, respectively.

Innovation and Infrastructure Investment

Fortinet's commitment to innovation is evident in its AI initiatives, with FortiAI now integrated across seven key solutions. The company's substantial infrastructure investment, including more than 3 million square feet of facilities, positions it for long-term cost advantages and enhanced security management capabilities. The recent acquisitions of Lacework and NextDLP expanded its addressable market by $20 billion.

Financial Outlook and Investment Thesis

The company's forward-looking guidance remains strong, with projected fourth-quarter revenue growth of 12% and full-year service revenue growth of 19%. With robust free cash flow margins of 38% and continued market share gains in a $284 billion total addressable market, Fortinet presents a compelling investment opportunity.

The Zacks Consensus Estimate for 2024 revenues is pegged at $5.88 billion, suggesting 10.89% year-over-year growth. The consensus estimate for earnings has moved north by 8.5% to $2.18 per share over the past 30 days.

Can FTNT Stock Justify its Premium in a Competitive Market?

Skeptics caution that Fortinet's current valuation may be stretched, and the stock could be vulnerable to a correction if growth rates slow down or competition intensifies. Fortinet's main competitors are Palo Alto Networks PANW, Cisco Systems CSCO, Check Point Software Technologies CHKP, CrowdStrike and Zscaler. Each of these companies has its own strengths and focus areas within cybersecurity.

Additionally, macroeconomic factors, such as potential economic slowdowns or shifts in corporate IT spending could impact Fortinet's growth trajectory. The company's ability to navigate these potential headwinds will be crucial in determining its stock performance in the coming months.

Valuation-wise, Fortinet's premium pricing is evident. Its forward 12-month price-to-sales (P/S) ratio of 11.74 is way ahead of the Zacks Internet Software industry average of 2.8. This elevated valuation suggests high growth expectations from investors but also implies increased risk. Fortinet will need to maintain its technological edge and continue delivering value to its customers to stay ahead of the curve.

FTNT’s P/S F12M Ratio Depicts Stretched Valuation

Conclusion

The ongoing digital transformation across industries continues to drive demand for comprehensive cybersecurity solutions. For investors seeking exposure to the cybersecurity sector, Fortinet's current position offers an attractive entry point. The combination of market leadership, technological innovation, and strong financial performance makes a compelling case for new investors to initiate positions. Existing shareholders should maintain their holdings, as the company's strategic initiatives and growing recurring revenue base suggest sustained long-term value creation potential. Fortinet currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Zacks Investment Research

Here are three stocks with buy rank and strong momentum characteristics for investors to consider today, November 13:

Toast, Inc. TOST: This cloud-based digital technology platform provider has a Zacks Rank #1 and witnessed the Zacks Consensus Estimate for its current year earnings increasing 20% over the last 60 days.

Toast, Inc. Price and Consensus

Toast, Inc. price-consensus-chart | Toast, Inc. Quote

Toast's shares gained 59.1% over the last three months compared with the S&P 500’s advanced of 9.7%. The company possesses a Momentum Score of A.

Toast, Inc. Price

Toast, Inc. price | Toast, Inc. Quote

Fortinet, Inc. FTNT: This cybersecurity and convergence of networking and security solutions provider has a Zacks Rank #1 and witnessed the Zacks Consensus Estimate for its current year earnings increasing 7% over the last 60 days.

Fortinet, Inc. Price and Consensus

Fortinet, Inc. price-consensus-chart | Fortinet, Inc. Quote

Fortinet's shares gained 36.2% over the last three months compared with the S&P 500’s advanced of 9.7%. The company possesses a Momentum Score of A.

Fortinet, Inc. Price

Fortinet, Inc. price | Fortinet, Inc. Quote

Payoneer Global Inc. PAYO: This financial technology company has a Zacks Rank #1 and witnessed the Zacks Consensus Estimate for its current year earnings increasing 28% over the last 60 days.

Payoneer Global Inc. Price and Consensus

Payoneer Global Inc. price-consensus-chart | Payoneer Global Inc. Quote

Payoneer Global's shares gained 54.3% over the last three months compared with the S&P 500’s advanced of 9.7%. The company possesses a Momentum Score of A.

Payoneer Global Inc. Price

Payoneer Global Inc. price | Payoneer Global Inc. Quote

See the full list of top ranked stocks here

Learn more about the Momentum score and how it is calculated here.

Zacks Investment Research

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How do you find the right combination of stocks that will generate returns that could fund your retirement, or your kids' college tuition, or your short- and long-term savings goals?

Enter the Zacks Rank.

What is the Zacks Rank?

A unique, proprietary stock-rating model, the Zacks Rank uses earnings estimate revisions, or changes to a company's earnings expectations, to help investors create a winning portfolio.

There are four main factors behind the Zacks Rank: Agreement, Magnitude, Upside, and Surprise.

Agreement is the extent to which all brokerage analysts are revising their earnings estimates in the same direction. The greater the percentage of analysts revising their estimates higher, the better chance the stock will outperform.

Magnitude is the size of the recent change in the consensus estimate for the current and next fiscal years.

Upside is the difference between the most accurate estimate, which is calculated by Zacks, and the consensus estimate.

Surprise is made up of a company's last few quarters' earnings per share surprises; companies with a positive earnings surprise are more likely to beat expectations in the future.

These four factors are assigned a raw score that's recalculated every night, which is then compiled into the ranking system. Stocks are classified into five groups using this data, ranging from "Strong Buy" to "Strong Sell."

The Power of Institutional Investors

The Zacks Rank also allows individual investors, or retail investors, to benefit from the power of institutional investors.

These professionals manage the trillions of dollars invested in hedge funds, mutual funds, and investment banks, and studies have shown that they can and do move the market because of the large amounts of money they invest with. Thus, the market tends to move in the same direction as institutional investors.

In order to determine the fair value of a company and its shares, institutional investors design valuation models that focus on earnings and earnings estimates. Because if you raise earnings estimates, it then creates a higher fair value for a company and its stock price.

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Not only can the Zacks Rank help you take advantage of trends in earnings estimate revisions, but it can also provide a way to get into stocks that are highly sought after by professionals.

How to Invest with the Zacks Rank

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Moreover, stocks with a new #1 (Strong Buy) ranking have some of the biggest profit potential, while those that fell to a #4 (Sell) or #5 (Strong Sell) have some of the worst.

Let's take a look at

Fortinet (FTNT)

, which was added to the Zacks Rank #1 list on November 13, 2024.

Headquartered in Sunnyvale, CA, Fortinet, Inc. is a provider of network security appliances and Unified Threat Management (UTM) network security solutions to enterprises, service providers and government entities worldwide.

13 analysts revised their earnings estimate upwards in the last 60 days for fiscal 2024. The Zacks Consensus Estimate has increased $0.17 to $2.18 per share. FTNT boasts an average earnings surprise of 23.6%.

Earnings are forecasted to see growth of 33.7% for the current fiscal year, and sales are expected to increase 10.9%.

Even more impressive, FTNT has gained in value over the past four weeks, up 20% compared to the S&P 500's gain of 3%.

Bottom Line

With a #1 (Strong Buy) ranking, positive trend in earnings estimate revisions, and strong market momentum, Fortinet should be on investors' shortlist.

If you want even more information on the Zacks Ranks, or one of our many other investing strategies, check out the Zacks Education home page.

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