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This High-Growth Stock Is Still a Great Buy After Gaining 40%

By Harsh Chauhan - May 27, 2021 at 8:45AM

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There's no stopping this fast-growing company thanks to its terrific end-market opportunity.

Cybersecurity specialist Fortinet's (FTNT -1.91%) stock has been popular on Wall Street this year thanks to a string of solid quarterly results and a bright forecast for the year ahead, and that's unlikely to change. In fact, Fortinet's quarterly report for the first quarter of 2021 indicates that it is switching into a higher gear.

Investors looking to add a fast-growing cybersecurity stock to their portfolios shouldn't be disappointed if they missed this stock's rally, as Fortinet remains an attractive buy even now. Let's see why.

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Fortinet's growth is gaining momentum

Fortinet's revenue increased 23% year over year in Q1 to $710 million thanks to growth in new areas and improved market share across its existing businesses. Fortinet registered 20% annual revenue growth last year, which means that it is off to a stronger start in 2021. Additionally, the company's second-quarter revenue guidance of $740 million indicates that it expects another quarter of 20%-plus top-line growth.

This solid initial growth has encouraged Fortinet to raise its full-year guidance. The company anticipates $3.1 billion in revenue this year at the midpoint of its guidance range, up from the initial expectation of $3.05 billion. The updated guidance translates into a 20% revenue increase over last year -- and Fortinet could even exceed its expectations thanks to improvements in deal activity, transaction size, and contract length.

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Fortinet struck 66 deals valued at over $1 million in Q1, up almost 74% from the prior-year period. The number of transactions valued at $500,000 and above increased from 120 in the year-ago period to 167. Additionally, the company saw a nice increase in the number of entry-level customers last quarter. Deals valued at less than $50,000 increased 17% year over year to 2,489, indicating that Fortinet is doing well to bring new customers into its fold.

What's more, Fortinet's average contract term increased year over year by nearly two months to 27 months during the quarter, indicating that it is locking in customers for a longer period. This combination of increases in deal activity, transaction size, and contract length has led to a nice bump in Fortinet's deferred revenue, which grew at a faster pace than the company's actual revenue.

The company exited the first quarter with $2.75 billion in deferred revenue, an increase of 25% over the prior-year period and slightly higher than its trailing-12-month revenue of $2.73 billion. Deferred revenue refers to the money collected by a company in advance for services to be delivered later. The amount is recorded on the income statement once the delivery takes place, so the improvement in this metric bodes well for Fortinet's future revenue growth.

Pulling the right strings to boost growth

Fortinet's improved growth profile is a result of its moves in fast-growing niches of the cybersecurity space. For instance, Fortinet struck 15 deals valued at over $1 million in the secure software-defined networking in a wide area network (SD-WAN) space last quarter. Management also pointed out on the earnings call that this drove up the average contract length.

It is not surprising to see the SD-WAN space account for nearly 23% of Fortinet's high-value transactions last quarter. Third-party estimates forecast a 34.5% annual increase in the SD-WAN market through 2025, driven by the increase in adoption of cloud computing, enterprise mobility, and software-as-a-service (SaaS) applications. As such, spending on cybersecurity to secure the SD-WAN market could keep moving north in the coming years and remain a tailwind for Fortinet.

Meanwhile, Fortinet is expanding its presence in the work-from-home space, which could open a new avenue of growth for the company. It recently invested $75 million in Linksys, a maker of home networking hardware and a subsidiary of Foxconn. This is a smart move considering that cybersecurity spending on remote work could increase in a post-pandemic scenario. A third-party survey of 413 cybersecurity and IT industry professionals conducted by Pulse Secure last year revealed that 55% of respondents were looking to increase their spending on securing their remote workforces.

All of this indicates that Fortinet is pursuing the right areas to ensure that it keeps growing quickly. Throw in the company's improving margin profile and it becomes easy to see why its bottom line is expected to grow in the mid-teens over the next five years, according to analyst estimates. So don't be surprised to see Fortinet sustain its impressive stock market rally and deliver more upside, making it an ideal pick for investors looking to buy a growth stock to take advantage of the cybersecurity space.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Fortinet. The Motley Fool has a disclosure policy.

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