Reconsidering the Investment
Fortinet (NASDAQ:FTNT) saw a 10% surge contingent upon its 2024 outlook. Despite the market’s positive reaction, scrutinizing the details leads me to reconsider labeling this stock a compelling buy at this juncture. The rally appears to miss the mark in delivering the robust impetus necessary to warrant further investment, leaving me disenchanted with its potential.
In the tech sector especially, competition is rife, and the landscape is teeming with more appealing alternatives than FTNT. As much as I had championed this stock in the past year, the current circumstances no longer sway me to anticipate substantial gains beyond $80 per share. In light of this, I believe it’s time to bid adieu to this stock and turn attention to other prospects in the market.
Reflecting on Past Predictions
As far back as October, an optimistic commentary elucidated:
According to my estimates, Fortinet is priced at around 30x next year’s EPS. It’s not the best and most compelling stock in the cybersecurity sector, but it’s trading at a very fair multiple, particularly after the stock sold off following its last earnings results. In summary, FTNT’s stock has faced challenges, partially justified, but not entirely. Overall, it still presents an attractive investment opportunity.
Fortinet has indeed been a focus of my bullish ruminations over the past year, yielding a commendable 20% upswing from my original recommendation. However, deeper contemplation of its valuation has led me to reassess the anticipated trajectory over the next twelve months, yielding a less optimistic perspective going forward.
Considering Fortinet’s Immediate Future
Specializing in cybersecurity solutions, Fortinet crafts products to safeguard computer networks and data from digital malefactors. Its emphasis on constructing secure systems for businesses is not without its merits. Notably, Fortinet has demonstrated a robust growth momentum in Q4, achieving a remarkable 8.5% upsurge in total billings, attributed to strategic pursuits of Secure Operations (Secure Ops), Secure Access Service Edge (SASE), and heightened sales team efficacy.
The company’s notable clientele, including 76% of the Fortune 100, positions Fortinet favorably to capitalize on the escalating demand for Secure Ops, SASE, and secure networking solutions. However, a descending product cycle initiated approximately four quarters ago points toward an impending recovery around early 2024.
Furthermore, supply chain disruptions have impeded product revenue growth, and the absorption of projects and products in 2024 is anticipated to influence the company’s financial performance.
Forecasts for 2024 Indicate a Modest Growth Trajectory
Fortinet’s anticipated growth of approximately 10% CAGR in 2024 fails to evoke the zeal warranted for such projections. Contrasted with the exuberance of past quarters, the current outlook feels comparably lackluster, even though it hovers at the higher end of its guidance range.
The tepid growth rates unenthusiastically eclipse its peers, with stalwarts like Palo Alto Networks (PANW) expected to burgeon at nearly 18% CAGR over the next 12 months and the rising star SentinelOne (S) gaining momentum. This presents a twofold challenge for Fortinet: investors’ reluctance to pay a premium for its stock and the company’s struggle to attract and retain top executive talent as growth rates taper off.
FTNT Stock Valuation – A Cause for Concern
The stock’s current valuation at 42x forward EPS, lower than Palo Alto Networks’ (PANW) 58x forward EPS, fuels apprehensions about investor enthusiasm, particularly when juxtaposed against an anticipated 10% CAGR for 2024. The challenge of maintaining high-caliber talent amidst decelerating growth further amplifies my decision to pivot away from Fortinet, urging investors to explore more promising options in the cybersecurity realm.
