Cybersecurity specialist Fortinet (NASDAQ:FTNT) has been pulling the right strings this year. The company gave its full-year fiscal 2019 guidance a nice bump recently along with impressive fiscal third-quarter results.
Despite Fortinet's double-digit top- and bottom-line growth over the past few quarters, the stock has underperformed the broader market this year. This might be due to the broader negativity prevailing because of the U.S.-China trade war.
But Fortinet doesn't seem to be impacted by the trade tensions. What's more, a closer look at the company's metrics will make it clear that it is built for growth.
Fortinet is not done growing yet
Fortinet's revenue increased by 21% year over year in the third quarter of 2019. More importantly, the company now forecasts 2019 revenue of $2.14 billion (at the midpoint of its guidance range), up nearly 19% from last year's figure of $1.8 billion.
But what's interesting to note here is that Fortinet's deferred revenue is growing at a much faster pace than its quarterly revenue. The company exited the third quarter with deferred revenue of $1.95 billion, up 26% from the year-ago period.
Deferred revenue is the money collected by a company in advance for services that will be rendered at a later date. The line item sits as a liability on the balance sheet at first and is recognized as revenue once the services are actually delivered.
The healthier growth in deferred revenue as compared to the actual revenue is a sign that Fortinet will be able to maintain its impressive top-line trajectory. That's because the company's deferred revenue supplies a major chunk of its subscription-based services business, according to CFO Keith Jensen:
Deferred revenue, at the beginning of the third quarter, accounted for over 90% of services revenue and 60% of total revenue recognized in the quarter. For the fourth quarter, we expect the deferred revenue balance to provide a similar level of predictability, accounting for similar percentages of service in total revenue.
Fortinet gets nearly two-thirds of its total revenue from its services business, which also enjoys a fat gross margin that's much higher than the company's product-related business. So the growth in deferred revenue is a positive sign for Fortinet's services business and the company as a whole considering the influence this segment has over its top line and margins.
More importantly, Fortinet's deferred revenue growth should continue to get better in light of the company's impressive deal-making activity. In the third quarter, Fortinet signed 53 deals with a transaction size of over $1 million each as compared to 30 deals a year ago. It's equally impressive that the company witnessed tremendous growth across all transaction sizes.
For instance, Fortinet inked 130 deals with a transaction size of at least $500,000, up from 103 in the prior-year period. The number of $250,000-plus deals came in at 333, compared to 264 last year. And finally, there were 1,908 deals with a transaction size of over $50,000, a nice jump from 1,710 such deals a year ago.
Meanwhile, Fortinet's average contract length stayed consistent year over year at 26 months. This combination of higher transaction activity and a stable average contract length of more than two years indicates that Fortinet is able to lock in lucrative long-term deals, which should pave the way for the company's future growth.
Yet another reason to buy
Fortinet stock is relatively cheap. It has a trailing price-to-earnings (P/E) ratio of 40, which is considerably lower than Fortinet's five-year average P/E ratio. Also, the company's forward earnings multiple is lower than that of its peers:
In sum, Fortinet's attractive valuation and potential to deliver sustainable double-digit growth make it one of the top cybersecurity stocks you can buy right now.