Over the past few years, several of the world's largest tech companies -- including Apple, Microsoft, Alphabet, and Nvidia -- became trillion-dollar companies. That growing list includes hardware, software, and chip companies. But we still haven't seen a single cybersecurity company join the 12-zero club yet.
Could Fortinet (FTNT 0.23%), a cybersecurity leader that was founded 23 years ago, have a shot at becoming the sector's first trillion-dollar company by 2040? Let's review its business model, growth rates, and valuations to find out.
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How fast has Fortinet been growing?
Fortinet initially upgraded traditional firewalls with network filtering tools to create "next-gen firewalls" (NGFWs). It then leveraged its early-mover's advantage in the NGFW market to weave a "Security Fabric" of end-to-end cybersecurity tools for on-premise, cloud-based, and Internet of Things (IoT) connections. That sticky ecosystem was powered by a mix of on-site appliances, software, and cloud-based services.
Fortinet differentiates itself from the competition by developing its own ASIC chips, which are customized for its own hardware and FortiOS software. It claims that the combination of first-party hardware and software enables it to tackle cybersecurity threats more efficiently than other traditional cybersecurity companies that use off-the-shelf components.
Fortinet went public in 2009 at a split-adjusted price of $1.25 per share. A $10,000 investment in its IPO would be worth about $424,000 today. It's easy to see why investors fell in love with the company: From 2009 to 2022, its annual revenue grew at a compound annual growth rate (CAGR) of 25%, its adjusted operating margin expanded from 14% to 26%, and its adjusted net income rose at a CAGR of 30%.
But can Fortinet maintain that momentum?
During its analyst day last May, Fortinet set a goal of generating $8 billion in annual revenue by 2025. To reach that target, it would need to grow its top line at a CAGR of 22% from 2022, which seemed realistic relative to its past growth.
But over the past year, it reined in its near-term forecasts as the macro headwinds made it tougher to gain new customers and sign longer-term contracts. Back in the first quarter of 2023, it predicted its billings would rise 21%-22% for the full year, with 21%-24% revenue growth. But by the third quarter, it had reduced its full-year guidance to just 9%-12% billings growth and 19%-21% revenue growth. It expects its billings to only rise by the "double digits" through the end of 2024.
It also stopped reiterating its long-term targets for 2025. Analysts expect it to only generate $7 billion in revenue in 2025, which would represent a CAGR of 17% from 2022. That slowdown caused its stock to drop 20% over the past six months.
Does it have a shot at becoming a trillion-dollar company?
Fortinet has a market cap of $41 billion and expects to generate $5.3 billion in revenue this year. Assuming it still trades at about 8 times sales by 2040, it would need to generate $125 billion in revenue to reach a trillion-dollar valuation.
To reach that goal, it would need to grow its top line at a CAGR of 20% from 2023 to 2040. That might seem achievable based on its growth rates over the past 13 years, but we shouldn't use its past performance to predict its future gains.
Fortinet could still struggle to keep pace with more diversified cybersecurity leaders like Palo Alto Networks, which has been rapidly expanding its portfolio of cloud-based and AI-driven cybersecurity services, as well as cloud-native challengers like CrowdStrike, which completely eliminate the need for on-site appliances.
As the competition intensifies, the growth of its core market could cool off. According to Fortune Business Insights, the global cybersecurity market should still grow at a CAGR of 14% from 2023 to 2030 -- but merely keeping pace with the broader market would represent a significant deceleration from Fortinet's historic growth rates.
Unpredictable economic downturns could also curb the growth of the cybersecurity sector. Cybersecurity companies are generally better insulated from the macro headwinds than other types of tech companies, but they can still struggle to sign on new customers and lock them into longer-term contracts.
Look beyond Fortinet's market cap
Fortinet has a slim chance of becoming a trillion-dollar company by 2040, but it could struggle to reach that milestone if it continues to lose its momentum. So instead of fretting over its ability to become a trillion-dollar company, investors should see if its recent slowdown is merely temporary or a sign that its business is maturing. If Fortinet is running out of room to grow, investors might be better off sticking with more promising cybersecurity plays like Palo Alto or CrowdStrike instead.
