Fortune (NASDAQ: FTNT) reported its second-quarter 2024 results on August 6. Since then, the stock has risen by a whopping 35% on impressive revenue and profit growth, beating Wall Street expectations.
The cybersecurity specialist also raised its full-year revenue forecast, further explaining why the stock has been in a parabolic swing, a phenomenon that refers to the rapid rise in a company’s stock price over a short period of time, much like the right side of a parabolic curve.
The good news for investors is that Fortinet’s stock price could continue to rise. This is because the company is targeting fast-growing niches in the cybersecurity market, which should allow it to benefit from a huge market in the long run.
Fortinet’s growth likely to improve
Fortinet posted Q2 revenue of $1.43 billion, up 11% from the year-ago quarter. Non-GAAP net income grew much faster at 50% from the year-ago quarter to $0.57 per share, thanks to a lower share count due to buybacks, lower indirect costs and growing demand for its higher-margin security subscription offerings.
Fortinet’s non-GAAP operating margin jumped from 26.9% to 35.1% as the share of service-based revenue increased year-over-year. Specifically, Fortinet’s service revenue increased nearly 20% year-over-year to $982 million, accounting for 69% of revenue. That was an improvement from the year-ago quarter, when service revenue accounted for 63% of revenue.
There is still a lot of room for growth in Fortinet’s service revenues, which also means that the company’s margin profile can continue to improve. The good news is that the improvement in Fortinet’s deferred revenues indicates that security subscription revenues can continue to improve.
The company’s deferred revenue rose 15% year over year to $5.9 billion in the second quarter, outpacing revenue growth. This metric refers to the money collected up front by a company for services that will be provided in the future. Once Fortinet provides those services, it can recognize the deferred revenue on the income statement as actual revenue.
With the company expecting its addressable market to grow to a whopping $228 billion by 2028, there’s a lot of room for Fortinet to grow as it expects its revenue to reach $5.85 billion in 2024. That would be a 10% jump from last year, but as the following chart shows, Fortinet’s growth is expected to accelerate going forward.
Is the stock worth buying now?
Fortinet is now trading at 44 times trailing earnings after its red-hot rally. That’s slightly lower than the U.S. tech sector’s average price-to-earnings ratio of nearly 46. Fortinet’s forward earnings multiple of 39 points is biased toward improving profits, and the good news is that analysts are now expecting stronger earnings performance from the company.
The forecast for the next five years is also positive, with Fortinet expected to achieve annual earnings growth of 15%. So let’s do some math.
Assuming the company can indeed achieve such solid growth thanks to the enormous opportunities it now has, earnings could rise to $4.10 per share after five years (using the expected earnings of $2.04 per share for fiscal 2024).
The Nasdaq-100 index has an average forward price-earnings ratio of 29 (the index is used as a proxy for tech stocks). Assuming Fortinet trades at a similar multiple after five years (which would be a significant discount to its current earnings multiple), the stock could rise to $119 (based on the $4.10 per share forward earnings calculated above).
These calculations point to a 58% increase from current levels. Therefore, investors may consider buying this cybersecurity stock despite the huge gains it has made recently.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Fortinet. The Motley Fool has a disclosure policy.
This Tech Stock Has Gone Parabolic And You Should Consider Buying It Before It Goes Higher was originally published by The Motley Fool
