Cybersecurity, specifically that which deals with the cloud, has a long runway for growth. Cloud computing-based security stocks have been a hot topic among investors for years now as the world goes all-in on mobile, remote work, and cloud-based services.
But often overlooked in this conversation is Fortinet (FTNT 0.52%). Far from being a "legacy" security vendor, Fortinet is an incredible allocator of capital and has been a fantastic investment for many years. And with management forecasting another year of almost 30% sales growth in 2022, it's still a great time to buy.
Capping off a great 2021
Just as a refresher, Fortinet specializes in firewalls -- traditionally a piece of hardware that monitors traffic in and out of a network and that filters out anything that isn't supposed to be there. With workforces suddenly going remote during the pandemic, some thought it was the nail in the coffin for this type of hardware-based security as offices became less of a necessity. But that's far from the case.
You see, even the cloud has to have actual physical infrastructure to operate. Demands being put on existing cloud services have kicked off a new upgrade cycle in data centers, networking equipment, and related hardware to support next-gen software capabilities. Such things can't be built without security protection. Enter Fortinet and its best-in-class firewalls and chips that power them.
2021 was a fantastic year for the company. 2020 was a bit sluggish, with overall sales growing only 20%, because enterprises briefly paused spending early in the pandemic. A big rally was in store in 2021, though, with Fortinet posting a 29% rate of sales growth, driven by a 37% jump in product (think hardware) revenue. Along the way, the business generated $1.2 billion in free cash flow, good for an enviable 36% free cash flow profit margin. This was in spite of the company making several key investments, like a new joint venture with networking company Linksys to provide new work-from-home security solutions.
I'd say Fortinet has a pretty good track record investing in its security capabilities since its IPO in late 2009. The numbers speak for themselves. It's a primary reason that Fortinet is currently, at least for the moment, the largest stand-alone cybersecurity company as measured by market cap, larger than Palo Alto Networks and growth stock darling CrowdStrike.
It's all about the outlook
As good as the Fortinet story has been, though, what really matters at this juncture is where it's headed next. After all, shares are currently trading for 45 times trailing-12-month free cash flow, implying the expectation this will remain a high-growth cybersecurity outfit for some time.
CEO Ken Xie and the top team have shareholders covered in this department. After an epic 2021, management thinks revenue will increase to $4.3 billion in 2022 at the midpoint of guidance, implying year-over-year growth of about 29%. Billings (revenue billed but not yet paid by customers) are expected to be $5.44 billion at the midpoint, implying momentum will carry over into 2023 as well. Xie said on the earnings call that remote work and the general cloud computing secular growth trend have reinvigorated Fortinet and its top-tier hardware and associated security services.
That outlook and management's ability to deliver similar numbers year in and year out is a big reason Fortinet deserves to be a top cybersecurity stock to consider buying right now. There are a lot of great names worth owning in this important niche of the tech industry, but few have the long-term track record Fortinet has at organically growing revenue and profits at such a fast pace. I remain a buyer after the rosy guidance for 2022 and beyond.