With its stock up 40% in 2017, including 9% since sharing third-quarter earnings last month, Fortinet (NASDAQ:FTNT) has had a banner year. It's not surprising Fortinet and most of its peers, including FireEye (NASDAQ:FEYE) and Palo Alto Networks (NYSE:PANW), are enjoying a stellar 2017.
Thanks in part to the much-publicized security breaches of late, cybersecurity is expected to become a $135.4 billion market this year. By 2021, securing data represents a $202.36 billion opportunity for Fortinet and its peers. But the opportunity ahead of Fortinet is only one of the reasons the best is yet to come. The good news for investors is that Fortinet is delivering on its core initiatives, which bodes well for the future.
First, the good news
In the third quarter, Fortinet generated $374.2 million in revenue, equal to an 18% improvement compared to a year ago. Fortinet also grew its bottom line in a big way, reporting per-share earnings of $0.15, nearly four times that of last year's $0.04 a share. Excluding one-time items, earnings skyrocketed to $0.28 a share compared to 2016's $0.04. Founder and CEO Ken Xie fully expects Fortinet to continue its stellar growth long into the future.
One long-term driver for Fortinet's growth is its "large installed base of network security customers." Fortinet's existing customer base provides an in-house opportunity for the company to sell its new-ish cloud and networking security fabric solution and generate increased service revenue.
The result of Fortinet's cloud security foothold and its security fabric end-to-end offering will enable it to "continue to grow at multiples of the market over the coming years." Now that Xie is getting a better handle on overhead, Fortinet's per-share earnings should also continue to soar.
Efficiently growing profits
Though Fortinet's expenses did rise, as they have in prior quarters, relative to its total revenue growth that rise was more than acceptable. Operating expenses were up just 9%, only half of Fortinet's top-line gain. Fortinet's focus on building its service revenue, another benefit of its security fabric offering, should help keep spending under control.
It simply costs less to service existing customers, not to mention selling new solutions to them as Fortinet does, than to rely solely on product sales to new customers. The $172.4 million spent on sales and marketing last quarter was 11% higher than a year ago, but nothing like what some of Fortinet's competitors are spending.
For some perspective, Palo Alto reported a record-breaking $505.5 billion in revenue last quarter, equal to a 27% jump. Sounds good, until the 21% boost in operating expenses to $418.4 is factored into the mix.
Palo Alto's sales spending jumped more than 17% to a mind-boggling $258.5 million, well over half its total revenue. The end result was a loss of $0.70 a share, 11% worse than Palo Alto's negative $0.63 a share a year ago. FireEye is another big spender. But, like Fortinet, it's aggressively taking steps to remedy past inefficiencies.
Some more good news
Once again, it was the strength of Fortinet's service revenue that fueled its total revenue growth. Though product sales were up a respectable, if not spectacular, 7% to $137.1 million, Fortinet's 26% rise in service revenue to $237.1 million was largely responsible for its strong quarter.
Fortinet's total deferred revenue, a good indicator of a sound sales pipeline, jumped 30% to $1.22 billion in the quarter. The icing on the cake for long-term investors -- and another reason the best is yet to come -- is despite its strong run in 2017, Fortinet remains a bargain relative to most of its competitors. Fortinet is trading well below its peer average, and at 35.5 times future earnings, its stock is even more attractive.
Tim Brugger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool recommends FireEye, Fortinet, and Palo Alto Networks. The Motley Fool has a disclosure policy.