The biggest tech trend over the next decade is cybersecurity. In this video clip from "The Rank" on Motley Fool Live, recorded on June 6, Fool.com contributor Jason Hall discusses several factors that make Fortinet (FTNT 0.58%) such a strong company in this sector and give it a foundation to build on for several years.
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Jason Hall: Fortinet for those that don't know is a cybersecurity and network security company. It's been around for about 20 years. Founded by two brothers. Both are still very involved with the company. One is a CEO, one is a president, people with engineering backgrounds, and started out focusing on network hardware, things like switches, and that sort of thing, and has expanded into services and software.
The reason I bought Fortinet is because the biggest tech trend to me that I think just seems so obvious, and so recession-resistant is security. It is the thing that companies are going to have to continue to pay for. This is not Adtech, where you can cut back on your marketing spend, where we're going to see that lumpiness because of the consumer economy that's going to affect ad dollars.
Even though the long tail is growth there. Even like with real estate, we're going to talk about some real estate platforms here, revenues are going to be lumpy because of the nature of residential real estate. But I think when you think about where is corporate America focusing its priorities, and its capital planning over the next decade. Cybersecurity has to be at the top of the list for just about every company.
Fortinet is an absolute winner here. What I want to show, I'm just going to show cash flows. [laughs] I'm not going to get into the details. This company is involved in probably a half a dozen different cohorts, different little buckets within security, and each of them has between $30 and $80 billion total addressable market. Each of these different buckets, and has an enormous addressable market across all of these different cohorts.
But what I want to do is just show you just operating cash flow and free cash flow for Fortinet. Can you see that guys? The top one is free cash flow and the bottom one is operating cash flow. Again, this goes back and when the company went public in 2010. This company has generated positive cash flow every year since it went public.
Again, this is a company that manufactures hardware and software. You can see since it's been putting more focus on software and services, that gross margin has continued to improve. This is also when it started going to more subscription-based revenue services. It is very, very well-run. I think it is also from a valuation perspective. But again, I'm going to put some context on this. Thirty-one times operating cash flow is bananas expensive, 41-times free cash flow is banana expensive.
But here's a really popular comp, CrowdStrike (CRWD 0.13%). Now they're not the same company at all. There are some differences. But again, this is a company that's been around for a very long time that has a wonderful growth record that has deep roots in the enterprise, and trades for what I think is at least a reasonable valuation compared to some of its peers with so much focus on cybersecurity. I'm a huge fan of Fortinet.
