The stock market is showing remarkable resilience in 2023 following a big clobbering in 2022. The S&P 500 has gained just over 7% so far this year. Cooling inflation, a potential pause in interest rate hikes by the Federal Reserve, and a solid job market are key reasons why major benchmarks have ticked higher this year despite a banking crisis and concerns of a potential recession.
This resiliency offers some proof that the stock market is a good place to park one's funds, especially in the long run, as it tends to deliver healthy gains despite periods of volatility.
Fortinet (FTNT 1.74%) is one such stock that delivered impressive returns over the years despite bouts of volatility. For example, a $100 investment in Fortinet stock five years ago is now worth almost $570. The cybersecurity specialist delivered average gains of almost 42% a year over the past five years. The good part is that it is in fine form in 2023 as well, up 40% so far. But more importantly, it seems capable of multiplying a $100 investment impressively over the next five years, too. Let's look at the reasons why.
Fortinet's outstanding growth is here to stay
Fortinet released first-quarter 2023 results on May 4. Total revenue jumped 32% year over year to $1.26 billion, driven by strong transaction activity and an improvement in the company's customer base. Its non-GAAP net income shot up to $270 million, or $0.34 per share, from $155 million, or $0.19 per share, in the year-ago period.
Wall Street would have settled for earnings of $0.29 per share on revenue of $1.2 billion, but the secular growth of the cybersecurity market and Fortinet's improving market share helped it crush expectations. More importantly, the company expects to finish 2023 with total revenue of $5.45 billion, according to the midpoint of its guidance range. That would be a 23% improvement over last year.
But don't be surprised to see Fortinet deliver faster growth thanks to its healthy revenue pipeline. The company was sitting on deferred revenue of $4.9 billion at the end of the quarter, up 33% from the prior-year period. The metric refers to the money collected in advance by Fortinet for services that will be rendered later. The faster growth in the deferred revenue as compared to its actual revenue can be attributed to higher customer spending.
For instance, the number of deals valued at $50,000 or more that Fortinet signed last quarter stood at almost 4,600, up 41% year over year. The company also saw solid growth in the number of deals priced at $500,000 or more, which came in at 323, an increase of 33% over last year.
Fortinet should be able to sustain such solid growth in the future as well because the company has gained solid traction in fast-growing cybersecurity niches like software-defined wide area network (SD-WAN) and operational technology (OT) security.
One-fourth of Fortinet's billings last quarter came from the SD-WAN and OT security markets. The company's overall billings -- another indicator of Fortinet's future revenue -- were up 30% year over year to $1.5 billion. The good part is that the demand for both SD-WAN and OT security is set to increase rapidly in the coming years. Prophecy Market Insights estimates that the SD-WAN security market could clock 32% annual growth over the next decade, generating $66 billion in annual revenue in 2032 versus just $3.5 billion last year.
Meanwhile, the OT security market is expected to double in size over the next five years, producing $32 billion in revenue in 2027 as compared to $15 billion last year. So Fortinet's growing share of the global cybersecurity appliance market puts it in a solid position to tap into these lucrative areas. According to IDC, the company controlled a 15.8% share of the cybersecurity appliance market at the end of 2022 versus 13.3% at the end of 2021.
Fortinet now occupies the second position in the cybersecurity appliance market, trailing leader Palo Alto Networks' share of 15.9% by a slim margin. What's more, it was the fastest-growing vendor during the quarter, with sales of its cybersecurity appliances increasing 24% over the year-ago period as compared to Palo Alto's growth of just 10%.
How much upside can investors expect?
The points discussed above suggest that Fortinet can continue to expand nicely in the long run, and analysts also anticipate the same from the company.
FTNT Revenue Estimates for Current Fiscal Year data by YCharts
Fortinet, however, anticipates faster growth and aims to hit $8 billion in annual revenue by 2025, which would be slightly ahead of analysts' forecasts. Given that the company targets fast-growing cybersecurity niches and is gaining more ground in this market, it seems capable of attaining its goal.
Assuming Fortinet does hit its $8 billion revenue target for 2025, its market cap could hit $87 billion within the next three years based on its five-year price-to-sales (P/S) ratio of 10.9. That would be a nice 64% increase over the company's current market cap of $53 billion. So a $100 investment in Fortinet stock now could turn into $164 in the next three years.
Now, Fortinet aims to clock 22% annual revenue growth through 2025, according to the company's analyst day held in May 2022. Assuming that it can increase its revenue at an annual pace of 20% in 2026 and 2027, its top line could jump to $11.5 billion after five years. Using the five-year average P/S ratio from above, Fortinet's market cap may jump to $125 billion after five years. That would be more than double the company's current market cap, which is why investors looking for a growth stock for the long haul should consider buying Fortinet before it flies higher.
