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Fortinet's Latest Acquisition Is Further Proof Cloud Is the Future of Cybersecurity

By Nicholas Rossolillo - Jul 23, 2020 at 7:11AM

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The quiet cybersecurity leader continues to build on its lead in a new era.

The redundancy crisis brought on by the COVID-19 economic lockdown has sent already high-flying cloud-based security stocks soaring. Firms like CrowdStrike Holdings (CRWD -0.86%) and Zscaler (ZS 2.89%), services that were born in and cater to modern cloud computing-based operations, have gotten a boost as organizations try to deal with shelter-in-place orders and a suddenly dispersed workforce. The two stocks are up over 110% and 170%, respectively, so far in 2020.  

But flying below many investors' radar is Fortinet (FTNT -0.13%). The legacy security vendor is up "only" 25% so far in 2020 as it makes its own migration to the cloud.

Compared to other large cybersecurity incumbents like Palo Alto Networks (PANW -0.06%) that have been making splashy acquisitions to update for the times, Fortinet has mostly taken a quieter organic approach by developing new services in-house. Fortinet recently made a rare move, though, acquiring cloud security outfit OPAQ Networks.  

It's further proof that a future cybersecurity industry called on to protect billions of devices -- rather than throw up fewer perimeters surrounding real estate like an office building -- is already here.

A person in the background pressing an illustrated lock icon in the foreground.

Image source: Getty Images.

What is OPAQ Networks?

Unless you're deep into the cybersecurity industry, OPAQ Networks is likely an unknown name. The startup was founded in 2013, and Fortinet is acquiring it for an undisclosed (which means small and immaterial) sum of cash. Fortinet had $1.57 billion in cash and investments and no debt on its balance sheet at the end of March 2020, and the takeover of OPAQ will likely barely register as a blip.

That doesn't mean it's an unimportant move. OPAQ was founded to tackle the emerging secure access service edge (or SASE, pronounced "sassy") technology. SASE combines a number of security and monitoring needs into a single cloud-based subscription service model and is designed to address a wide area of IT operational management and security (from remote devices to on-premises hardware to everything in between).

Combined with endpoint security (software that protects remote devices like smartphones, laptops, and network-connected sensors), SASE, like what OPAQ offers, is more important than ever during the pandemic. Companies have had to accelerate their migration to the cloud, and remote work has become an absolute necessity. OPAQ will bolster Fortinet's existing SASE service and help it scale up its growing cloud security platform as it helps its customers amid challenging circumstances.  

Small but purposeful acquisitions

For years, Fortinet has slowly eased its way into the cloud sandbox via its own home-grown services, but OPAQ marks the third acquisition in the last year to help it accelerate its transformation. In autumn 2019, endpoint security firm enSilo and security orchestration and automated response firm CyberSponse were purchased (also for small undisclosed sums). While not enough to move the needle on their own, both were fortuitous moves. 

Fortinet's revenue grew at a 20% year-over-year clip in 2019, a rate that accelerated to 22% in the first quarter of 2020 as COVID-19 began to sweep across the globe. Helping manage organizations' cloud transition is the reason, and the outlook for the rest of the year remains rosy even though the world has been upended by pandemic.

Adding OPAQ to the mix would indicate Fortinet sees further cloud business opportunities ahead -- which helps support the stock's run this year, as well as the not unreasonable 28.6 times 12-month free cash flow (revenue less cash operating and capital expenses) price tag. 

Fortinet will provide an update on second quarter 2020 results on Aug. 6. Stay tuned.

Nicholas Rossolillo and his clients own shares of CrowdStrike Holdings, Inc., Fortinet, and Palo Alto Networks. The Motley Fool owns shares of and recommends CrowdStrike Holdings, Inc., Palo Alto Networks, and Zscaler. The Motley Fool recommends Fortinet. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Fortinet, Inc. Stock Quote
Fortinet, Inc.
$53.32 (-0.13%) $0.07
Palo Alto Networks, Inc. Stock Quote
Palo Alto Networks, Inc.
$501.07 (-0.06%) $0.30
Zscaler Stock Quote
$168.15 (2.89%) $4.73
CrowdStrike Holdings, Inc. Stock Quote
CrowdStrike Holdings, Inc.
$189.52 (-0.86%) $-1.65

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