Leading cybersecurity company Fortinet (FTNT 1.74%) put up some impressive numbers to kick off 2021. Revenue advanced 23% year over year to $710 million and adjusted net income was up 29% to $136 million, and full-year expectations were given an upgrade from management. As the economy slowly finds its feet again, the company is discovering plenty of new outlets for its diversified security services, including in 5G, edge computing, and data centers.
Share prices are up 35% so far this year alone, so Fortinet is no longer the undervalued and underappreciated stock it was last year. Nevertheless, the company has a long track record of double-digit percentage growth. It's easily on pace to keep that run going in 2021. Here are three reasons why
1. Product sales are making a comeback
Cloud-based software security providers were all the rage last year, and for good reason. The world is rapidly migrating to cloud computing, and services delivered via the internet demand a new type of solution to keep data safe. But securing physical assets is still a must. Data centers and sprawling networks are needed to build the mobile world in which we now live, and Fortinet's products are some of the best in the industry.
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To wit, even last year when hardware revenue dried up for some companies as organizations slashed spending products during the start of the pandemic, Fortinet remained in growth mode. Its product sales segment ended 2020 up 16% from the year prior. However, that rate of growth reflects some disruption from COVID-19.
In Q1, product sales accelerated to a 25% year-over-year growth rate, and it's likely to stay high for another couple of quarters as Fortinet clears the low financial bar set in 2020. Plus, the tech industry is in a new upgrade cycle for its data centers and networking equipment. This bodes well for Fortinet, as it sells its chips and other security equipment to help keep those new tech hardware assets safe.
2. Fortinet services are still chugging away at a fast clip
Fortinet isn't just a legacy hardware cybersecurity company, though. Not to be left out of the cloud and edge computing craze, it has steadily built out its own suite of next-gen software-based security tools to help organizations keep their operations on lockdown from those with nefarious intent. In fact, though not putting up the blistering growth rates like peers such as CrowdStrike Holdings, this segment is also more than holding its own at Fortinet. Service revenue grew 22% year over year in Q1, up from the 20% rate notched in 2020.
Paired with the rallying product sales, management is expecting good things for full-year 2021. Guidance was given an upgrade and revenue is now expected to be $3.08 billion to $3.13 billion (previously pegged at $3.03 billion to $3.08 billion). At the midpoint of guidance, that's a 20% year-over-year increase. Adjusted earnings per share are expected to increase at least 9%, reflecting a higher pace of investment as Fortinet keeps its foot on the gas to maximize its potential during the rapid expansion of the cloud industry.
3. Fortinet is flush with fresh cash
Speaking of investment, Fortinet tapped the bond markets for the first time ever back in February, raising nearly $1 billion in fresh cash via the sale of notes. The company took advantage of the low rate environment and its superb financial strength to sell $500 million worth of notes due in 2026 at a super low interest rate of 1%, and another $500 million due in 2031 at an interest rate of 2.2%. As a result, Fortinet ended March 2021 with $2.94 billion in cash and equivalents, $151 million in long-term investments, and debt of just $987 million. The company thus has plenty of liquidity to invest in further expansion or make acquisitions within the cybersecurity industry.
At the midpoint of 2021 guidance, Fortinet shares currently trade for 54 times adjusted earnings per share -- a premium to be sure, but not unreasonable given the business' trajectory and all that cash it can leverage to advance its growth story. This remains a top cybersecurity software stock to watch.
