Fortinet (FTNT 1.02%) is among the top names in the cybersecurity industry -- both in terms of size and tech know-how and also in investment returns. The company has managed a fast and steady growth rate for many years, and is a superb example of a technology company allocating resources to the right projects at the right time. With a new digital era on the rise, Fortinet could have plenty of growth left in the tank.

This isn't a perfect stock, though, especially considering the fast-moving nature of the cybersecurity industry it operates in. Here are the bear and bull cases on Fortinet that investors need to know about.

The bear case against Fortinet

Any bear case against high-growth stocks these days tends to start with valuation, and Fortinet is no exception. Shares currently trade for 41 times trailing 12-month free cash flow. That's a premium price tag, especially for a company like this that derives nearly 40% of its revenue from product sales. Hardware sales are cyclical, and a current upgrade cycle in data centers and enterprise computing products (which pushed Fortinet's product revenue to 54% year-over-year growth in Q1 2022) won't last forever.

But valuation really only scratches the surface here. Cybersecurity is a tough industry -- the bad guys are constantly upping their game to try and crack targeted organizations' defenses. And in the battle against those with nefarious intent, Fortinet's peers are also constantly evolving. It isn't uncommon for a one-time high-flying security outfit to fall out of favor as more advanced upstarts pass it technologically (like what has happened in recent years with the rapid migration to cloud computing). 

There's also risk from Fortinet's business model. The company relies almost entirely on third-party vendors and distributors for revenue, a risk it calls out in its quarterly and annual financial filings. In fact, in its Q1 2022 report, Fortinet said one distributor accounted for 29% of total accounts receivable (balance of money owed for services rendered or product sold).

Fortinet has also said that substantially all of its revenue is derived from outside of the U.S., since most of these vendors and distributors are non-U.S. companies (although many final users of Fortinet security products and services are in the U.S.). As a result, Fortinet's revenue could take a hit from the record run the U.S. dollar has been on versus foreign currencies -- an effect that has taken a toll on many other multinational tech companies as of late.

The bull case for owning Fortinet stock

Risks aside, Fortinet has done a superb job maintaining its momentum over the last decade. The company has sustained a fast and steady revenue growth rate for years, primarily from developing new in-house security services and making small joint ventures and small acquisitions of peers along the way. And because of its reliance on third parties for sales, it has a lean operating model that generates lots of free cash flow (34% free cash flow profit margin in the last year). 

FTNT Revenue (TTM) Chart

Data by YCharts.

These smaller and incremental developments Fortinet invests in typically aren't the big and bold moves that make news headlines like some of its contemporaries in the cybersecurity space. However, Fortinet's allocation of capital has clearly been paying off. A more recent batch of deals -- like its joint venture with Linksys to help Fortinet break ground into security for individual users and small businesses, and a collaboration with Singapore's Quantum Engineering Programme to begin work on security services built for quantum computing -- could pave the way for continued growth for years down the road.

And given that cloud computing is all the rage these days, continual migration to cloud computing bodes well for Fortinet. Many of the company's products and recurring service revenue tied to the sale of products are geared toward cloud security. While the current boom in hardware sales will likely cool off sooner or later, that doesn't mean growth will peter out entirely. The cloud industry is expected to continue expanding for the rest of the current decade, which means Fortinet could continue to expand along with it. 

In support of this growth, Fortinet has a strong balance sheet. Cash and short-term investments totaled $2.11 billion at the end of March 2022. Another $361 million in long-term investments was also reported. Total debt sat at just $989 million. 

Fortinet is one of my favorite cybersecurity stocks, but it's important to review what could go wrong. Given the high level of competition in this pocket of the IT sector, I take a basket approach and invest in multiple security stocks to help spread out the risk. But if you're looking for a stock to build a cybersecurity stock portfolio around, I think Fortinet is a great place to start.