Fortinet (FTNT -1.57%) stock has shot up more than 120% in 2021 thanks to a string of impressive quarterly performances that have consistently trumped Wall Street's expectations. A similar story unfolded when the cybersecurity specialist released its third-quarter results on Nov. 4.
Fortinet's revenue and earnings easily beat projections, and its robust guidance was the icing on the cake. Let's look at what's driving Fortinet's growth and see why the stock might replicate its terrific performance on the market once again in 2022.
These metrics indicate Fortinet's high growth is sustainable
Fortinet's third-quarter revenue was up 33% year-over-year to $867 million, while adjusted net income increased to $0.99 per share from $0.88 per share in the prior-year period. Wall Street was expecting $0.94 per share in earnings on revenue of $812 million from Fortinet in the third quarter. But the company's strong deal momentum and the stronger sales of high-end products led to a better-than-projected performance.
What's more, Fortinet's guidance for the fourth quarter outpaced expectations. The company anticipates $955 million in revenue at the midpoint of the guidance range, while non-GAAP earnings are expected to range between $1.10 and $1.15 per share. For comparison, analysts were previously looking for $917 million in Q4 revenue from Fortinet.
The midpoint of Fortinet's revenue guidance indicates that it is on track to record year-over-year revenue growth of nearly 28%. The company's bottom line is also slated to improve over the prior-year period's figure of $1.06 per share. However, Fortinet could crush expectations once again as it is witnessing robust demand for its cybersecurity offerings.
The company struck 83 deals worth more than $1 million last quarter, up from 48 in the year-ago period. The number of deals worth more than $500,000 also increased substantially to 232 in Q3 from 168 in the same quarter last year. Fortinet also saw an increase in the number of entry-level customers and struck more than 3,000 deals valued at over $50,000, up from 2,267 in the year-ago period.
Additionally, Fortinet's product mix improved during the quarter as high-end customers accounted for 37.7% of its FortiGate next-generation firewall (NGFW) solution, up from 36.5% in the prior-year period. The number of deals for securing software-defined wide area networks (SD-WAN) also doubled year over year to 19 during the quarter.
These numbers indicate that Fortinet has gained impressive traction in the fast-growing niches of the cybersecurity market. The secure SD-WAN market, for instance, is projected to clock an annual growth rate of 20% through 2024 as per a third-party estimate. Meanwhile, the demand for NGFW is forecasted to grow at 12% a year in the long run, according to Mordor Intelligence.
Another interesting thing to note about Fortinet last quarter was the increase in its average contract term to 29 months, up from 26 months in the year-ago period. So, Fortinet customers are not only signing bigger deals in terms of the transaction size, but they are also committing to longer contracts. Not surprisingly, Fortinet's deferred revenue increased 30% year over year in the third quarter to $3.11 billion, which is nearly equal to the company's trailing-twelve-month revenue of $3.13 billion.
The deferred revenue refers to the money collected in advance for services that will be delivered later. It is recognized on the income statement once the services are delivered, so Fortinet's strong level of deferred revenue points toward a robust customer engagement that should lead to consistent revenue growth.
The stock's hot rally could continue
It won't be surprising to see Fortinet stock replicate its stunning performance in 2022. The company is set to close this year on a high, and analysts expect the momentum to continue into the new year. Analysts also estimate that Fortinet's revenue and earnings are likely to jump nearly 18% in 2022.
More importantly, the company's strong deferred revenue pipeline, impressive deal momentum, and presence in fast-growing cybersecurity niches such as SD-WAN and NGFW could help it exceed expectations. All of this indicates that Fortinet could remain a top cybersecurity stock to hold on to for long-term gains.