Stock splits are getting a lot of attention this summer: Amazon just completed its 20-for-1 split, Alphabet's 20-for-1 action is coming up fast, Shopify approved a 10-for-1 split, and Tesla's board of directors just signed off on a 3-for-1 split. The four stocks have been clobbered despite the hype. So far in 2022, Amazon is down 36%, Alphabet is down 26%, Shopify has cratered 77%, and Tesla is off 38% as of this writing.
But another tech stock is splitting and outperforming peers: Fortinet (FTNT 1.00%). The cybersecurity giant announced the details for a 5-for-1 split on June 9 to little fanfare. Shares have been beaten up a bit, too (down 25% in 2022), but business is booming. Here's why it's a buy now.
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A data center upgrade cycle boosts Fortinet's prospects
Fortinet shares will be divvied up on June 22, leaving shareholders on June 23 with five shares for every one they owned prior. As a reminder, the share price will also be divided by five to adjust accordingly, so the value of Fortinet as a company is not changing. How did we get to this point? Well, since the company's initial public offering (IPO) in late 2009, Fortinet's stock price has increased a whopping 3,140%. A 2-for-1 stock split occurred in 2011.
Why split the stock now? There are a few reasons why. Fortinet might simply be trying to raise awareness of its business -- which makes sense given this is a little-known company but actually the second-largest standalone cybersecurity company by revenue behind Palo Alto Networks. A stock split may also help a company manage its stock-based compensation paid to employees or increase liquidity to manage share repurchases.
Regardless of the reason, simply remember Fortinet's valuation will remain the same after the stock split. Though the share price will be smaller, it doesn't mean the stock is "cheaper," especially not in a world where it's common to be able to purchase fractional shares at many stockbrokers.
Here's what's important to know: Fortinet is growing at a brisk pace right now. Revenue was up 34% year over year in the first quarter of 2022 to $955 million, and management expects full-year sales to be up about 31%. In the wake of the pandemic and amid roaring inflation, organizations are looking for ways to strengthen their efficiency. That has them leaning into cloud computing, which means increased data center construction and upgrades, more internet-connected devices, and software to keep the whole patchwork of networks and machines safe.
Cybersecurity is a fast-changing area of the IT world. Lots of companies in this space have fallen by the wayside over the years as trends have changed. But Fortinet has been an exceptionally good developer of new cybersecurity technology.
Though its roots lie in firewalls (traditionally, a device that monitors traffic within a physical location), Fortinet now derives nearly two-thirds of its revenue from software and recurring service. It's still making investments in new areas, too. For instance, it recently announced it would be exploring security for quantum computing in collaboration with Singapore's Quantum Engineering Programme.
Invest for the highly profitable growth
Fortinet isn't just a high-growth security company. It's also highly profitable. Free cash flow was $1.21 billion over the last 12-month stretch, a 34% margin. Part of Fortinet's success in self-funding new growth initiatives has a lot to do with its discipline in keeping expenses in check so that it has ample resources at its disposal.
Fortinet currently trades for 37 times trailing-12-month free cash flow. Of the other big-tech stock splits this year, only Alphabet trades for cheaper (21 times trailing-12-month free cash flow), but Fortinet is growing at a faster rate. If stock splits have your attention, Fortinet is more than worthy of being added to your watch list.
