Is Fortinet Stock a Buy Now?

Fortinet's (FTNT 0.46%) stock tumbled 13% on March 7 after the cybersecurity company announced it would suspend its operations in Russia in response to its military invasion of Ukraine. In a statement, Fortinet's founder and CEO Ken Xie said, "We regret the impact this will have on our employees, partners, and customers who are adversely impacted by the actions of the Russian government."

That announcement wasn't surprising since many other American companies have also recently suspended their operations in Russia. So did investors overreact to the news and prematurely flee from Fortinet, which posted a strong top- and bottom-line earnings beat just over a month ago?

Image source: Getty Images.

What does Fortinet do?

Fortinet's core product is a next-gen firewall called Fortigate, which the company expands through a network of on-site appliances called the "Fortinet Security Fabric." This "fabric" provides end-to-end protection for on-premise, cloud-based, and Internet of Things (IoT) devices across an organization's network.

Fortinet serves over half a million customers worldwide, including most of the Fortune 500, and leverages its artificial intelligence and machine-learning algorithms to analyze over 100 billion events each day.

How much revenue does Fortinet generate in Russia?

Fortinet doesn't disclose how much revenue comes from the various countries it operates in, just the regions of the world. In 2021, the company generated 41% of its revenue from the Americas, 38% from Europe, the Middle East, and Africa (EMEA) -- which includes Russia and Ukraine -- and the remaining 21% from the Asia-Pacific (APAC) region. Here's how rapidly those three regions grew during the year.

Data source: Fortinet. YOY = Year over year.

Fortinet said that six unnamed countries accounted for approximately 50% of its billings in 2021. The rest came from more than 100 countries which each contributed less than 3% to its total billings. As long as Russia wasn't one of Fortinet's top six markets, investors should assume that it accounted for a very low single-digit percentage of its total revenue.

Based on that logic, Jeffrey Sonnenfeld and his research team at the Yale Chief Executive Leadership Institute estimated that Fortinet generates approximately 2.5% of its revenue from the Russian market. That minimal exposure doesn't seem to justify a 13% single-day decline in its stock price.

Furthermore, the Russian-Ukrainian conflict could trigger stronger demand for Fortinet's services in other markets that are exposed to Russian cyberattacks. That global growth could easily offset the company's loss of Russian revenue -- which would have been significantly eroded by the ruble's precipitous decline over the past two weeks. A timely retreat from Russia would also likely shield Fortinet from any negative PR which might arise regarding the Russian government's usage of its cybersecurity services.

However, backing out of Russia indicates that its tools aren't politically neutral. Abruptly shutting down its services could also expose private Russian businesses to cyberattacks and prompt other overseas customers to rethink the long-term risks of using American cybersecurity services.

Should you buy Fortinet's post-earnings dip?

In fiscal 2022, Fortinet expects its revenue to rise 28% to 29% and its adjusted earnings per share to grow 22% to 25%. Unlike many other high-growth cybersecurity companies, Fortinet will also likely remain firmly profitable on a generally accepted accounting principles (GAAP) basis.

Based on those expectations, Fortinet's stock trades at about 60 times its forward adjusted earnings and 11 times this year's sales. Those valuations are reasonable relative to other cybersecurity companies.

For example, Palo Alto Networks (PANW 1.43%), which also provides next-gen firewalls, trades at about 80 times forward earnings and 10 times this year's sales. Analysts expect Palo Alto's revenue and adjusted earnings to grow 28% and 19%, respectively, for the full year.

Fortinet's stock has only declined 7% over the past six months, compared to the Nasdaq Composite's 17% drop during the same period. That resilience suggests that its core business is well-insulated from inflation, rising interest rates, and other macroeconomic headwinds. The suspension of its services in Russia shouldn't cause any lasting damage.

Therefore, Fortinet's recent dip looks like a buying opportunity for long-term investors. The stock could continue to stumble in this challenging market, but I think it will eventually stabilize and head higher alongside Palo Alto Networks and other high-quality cybersecurity stocks.