In a recent episode of The Rank, a panel of our analysts and experts ranked Fortinet (FTNT 3.26%) fourth out of seven popular cybersecurity stocks. In this Fool Live video clip from the episode, recorded on May 28, Fool analyst Tim Beyers and Chief Growth Officer Anand Chokkavelu discuss Fortinet's business and why this company didn't make it to the top of the list.
Tim Beyers: Fortinet is another one of those hardware companies, and this is going to be a difficult one, because Fortinet, if you just look at the financials, guys, you would say, "Wow! This is a really healthy company." And you know what? It is. It sells a wide range of hardware, and the hardware is generally recognized as very good. It's near best in class. The next-generation firewall, really good. They have a lot of use cases, including things like virtual private networks, intrusion prevention, preventing SSL injections, which is a very common attack. They just have really good product, and they are moving to cloud. They do have some cloud products that they've fronted. It's a very small part of the business, and the transition is probably going to take a long time. I believe the founder is still there, still owns a meaningful stake. There is a lot.
You kind of have to suspend disbelief. If you're going to invest in Fortinet, you have to believe that they can keep relevant with the hardware they've got, knowing that their hardware is good, that chief information security 0fficers like it, that it has multiple use cases, but it's built around the firewall. You have to suspend some disbelief and say like, "Okay, I know there's going to be some companies that build out their security infrastructure by buying some of their own hardware. They may add other things to it, but they're still going to buy some best-in-class hardware." That's the thesis for Fortinet.
Because it generates a ton of cash flow. It's still growing a little bit. It's got some meaningful backing. This is not a bad company. But I believe it's sailing into headwinds. I think the world is moving away from where Fortinet is. They're trying to sail to where the world is going, but they have this business -- we've talked about this in the past; the late great Clayton Christensen called it the innovator's dilemma -- where you have to disrupt your business in order to be relevant, and that's where Fortinet is.
I can't knock it. I like it a lot more than I like FireEye (MNDT 0.26%), but I think the world is moving away from where Fortinet is.
Anand Chokkavelu: Can I change my ranking? Is it too late? I did give it some extra love on the financials Tim was talking about. If I glance over, it's 13 times sales, 20% growth. But what was really interesting about it was $2 billion in net cash and then 18% net income margin, and the free cash flow margin's even better than that.
Beyers: I know.
Chokkavelu: It's crazy.
Beyers: How do you argue against that? You can't argue against that. That is the sign of a healthy business. But I'm not looking at now; I'm looking at what happens in the next 10 years. Are they harvesting a dying crop? Or how do they get from here to multibagger 10 years from now? That's a harder question to answer, Anand.