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Fortinet Is Winning Big in the Cybersecurity Wars

By Nicholas Rossolillo - Nov 6, 2019 at 10:45AM

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This legacy cybersecurity company is in a unique and enviable position.

Here's a novel idea: running a high-growth and profitable technology outfit. That's easier said than done, though. Tech companies that can manage both are few and far between, as there's usually a trade-off between sales growth and profitability -- especially in an industry where innovation and disruption are a constant concern.

And yet Fortinet (FTNT 3.68%) is doing just that. Third-quarter 2019 revenue and adjusted earnings per share growth accelerated to 21% and 37% year over year, respectively, easily surpassing expectations. What's so impressive is that Fortinet -- already one of the largest cybersecurity-focused companies on the block -- has managed these numbers in the face of stiff competition and disruption as the security space evolves to address the needs of businesses and organizations in this age of cloud computing, mobility, and proliferating new connected devices. If this one wasn't on your watch list before, it should be now.

Breaking down the numbers

Fortinet isn't a newcomer to the digital security universe. The company was founded back in 2000, providing firewalls (a hardware device that acts as a gatekeeper for data, deciding what enters or leaves a network) for organizations that were dealing with new demands as internet use at work started to boom.

Upgrades to the hardware-based services continue, and CEO Ken Xie said product refreshes have been helping his company win market share. But the world has evolved and needs have changed. Software-based security is on the rise, especially as workforces become more mobile and cloud computing becomes increasingly important to organizations.  

A man in a suit in the background is pressing an illustrated lock in the foreground, which is connected to other symbols associated with cybersecurity

Image source: Getty Images.

That has made a complicated mess for IT teams, and the need for fewer security vendors has been a driving force in cybersecurity decision making. Fortinet saw the trend early and started building out its "Security Fabric" service -- an end-to-end solution for large enterprises -- to help it continue to scoop up market share. Xie said that even with many organizations migrating to new digital systems, "Fortinet's broad range of hybrid and multi-cloud solutions enables us to provide security to the cloud, and from the cloud." The result has been an incumbent cybersecurity company that is more than holding its own and is outpacing average industry growth -- both on the top and bottom lines.


Nine Months Ending Sept. 30, 2019

Nine Months Ending Sept. 30, 2018



$1.54 billion

$1.29 billion


Gross profit margin



1.2 pp

Operating expenses

$951 million

$826 million


Earnings per share




Data source: Fortinet. YOY = year over year; pp = percentage points.  

A little help needed, but not much

What's impressive about Fortinet is that the cybersecurity industry has been getting a serious makeover the last couple of years. Cloud-based upstarts like Zscaler, Okta, and CrowdStrike Holdings have exploded onto the scene. Older firms have been in need of an update, and some haven't been aging gracefully. Struggling security giant Symantec got cut in half this year, with the enterprise division getting bought out by Broadcom. Other firms have turned to acquiring small start-ups to solve the problem.

Compared with other large players in the space like Palo Alto Networks, Fortinet has chosen to organically grow its way into this new era of cybersecurity. It does make a purchase occasionally, like its pickup of small endpoint security start-up enSilo announced right before the third quarter. But the disciplined approach has meant costs have remained in check so that ensuing growth from new product launches is profitable sooner rather than later. The steady results over the last decade since the company went public speak for themselves. 

FTNT Revenue (TTM) Chart

Data by YCharts.

Xie said enSilo will help Fortinet's existing solutions lead the company in emerging new trends like 5G mobile networks and Internet of Things security. Far from indicating an evolving cybersecurity landscape is a concern, the last report is proof Fortinet is thriving because of the changes. The stock trades at 22.7 times free cash flow -- not cheap, but reasonable given how fast profits are growing. After another rock-solid report, this stock is worth considering.

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Stocks Mentioned

Fortinet, Inc. Stock Quote
Fortinet, Inc.
$285.28 (3.68%) $10.12
NortonLifeLock Inc. Stock Quote
NortonLifeLock Inc.
$24.31 (2.31%) $0.55
Broadcom Limited Stock Quote
Broadcom Limited
$543.19 (-0.55%) $-3.02
Palo Alto Networks, Inc. Stock Quote
Palo Alto Networks, Inc.
$478.68 (9.70%) $42.31
Okta Stock Quote
$84.22 (1.43%) $1.19
Zscaler Stock Quote
$136.89 (3.47%) $4.59
CrowdStrike Holdings, Inc. Stock Quote
CrowdStrike Holdings, Inc.
$148.74 (4.28%) $6.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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