Fortinet (FTNT 0.23%) went public in 2009 at a split-adjusted price of $1.25 per share. If you had invested $20,000 in the cybersecurity company's IPO, your investment would be worth about $1.12 million today.
Fortinet repeatedly impressed the bulls with its robust growth rates. From 2009 to 2023, its revenue grew at a compound annual growth rate (CAGR) of 24% as its billings rose at a CAGR of 25%. Its adjusted operating margin doubled from 14% to 28%, while its adjusted net income increased at a CAGR of 31%.
Those growth rates are impressive, but can Fortinet turn $20,000 into $1,000,000 again over the next two decades?
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Fortinet's business model
Fortinet's first major product was a next-gen firewall (NGFW) that strengthened traditional firewalls with network filtering tools. It subsequently expanded its reach beyond that firewall with a "Security Fabric" that provides end-to-end cybersecurity services for on-premise, cloud-based, and Internet of Things (IoT) devices. It provides those services through a mix of on-site appliances, software, and cloud-based services.
Many cybersecurity companies install off-the-shelf chips in their appliances, but Fortinet develops its own custom ASIC chips for its appliances and FortiOS software. It claims that combination of first-party hardware and software enables it to counter cybersecurity threats more efficiently than its industry peers. It also believes that strategy will lock in its customers as the cybersecurity, networking, and hybrid cloud markets converge.
Fortinet now serves more than 705,000 customers globally, including most of the Fortune 500, and analyzes over 100 billion events every day. That's why it's widely considered a bellwether of the growing cybersecurity industry.
But can Fortinet maintain its momentum?
Fortinet's revenue rose 20% in 2020, 29% in 2021, and 32% in 2022. In May 2022, it also set a goal of generating $8 billion in revenue by 2025. To hit that target, it would need to grow its revenue at a CAGR of 22% from 2022 to 2025.
But in 2023, Fortinet's revenue only grew 20%. That deceleration was caused by difficult comparisons to elevated purchases throughout 2022 (in response to the supply chain constraints of 2021), macro headwinds that throttled the deployment of those on-site appliances, and a broader cyclical slowdown in firewall upgrades.
For 2024, the company expects its revenue to grow just 8%-10% as it continues to navigate those challenges. That slowdown suggests Fortinet will broadly miss its original revenue target for 2025, but it expects its revenue growth to accelerate again in the second half of 2024. For now, analysts expect its revenue to grow 9% in 2024 and 14% to $6.6 billion in 2025.
As Fortinet's growth cools off, it's trimming its staff, cutting costs, and repurchasing its shares to boost its adjusted earnings per share (EPS), which rose 37% in 2023. However, it expects that figure to rise just 1%-4% in 2024 as its revenue growth slows down and it ramps up its spending. Analysts expect its adjusted EPS to grow 5% in 2024 and 14% in 2025.
Fortinet's slowdown might be temporary, but it's growing more slowly than its larger competitor Palo Alto Networks. Palo Alto's revenue rose 25% in fiscal 2023 (which ended last August), and it expects 18%-19% growth in fiscal 2024. Palo Alto is also a leader in the NGFW market, but it provides a broader range of cloud-based security tools and AI-powered threat detection services than Fortinet.
Could Fortinet generate millionaire-making gains in 20 years?
At 40 times forward earnings, Fortinet seems a bit cheaper than Palo Alto, which trades at a multiple of 69. If Fortinet maintains that price-to-earnings ratio and grows its EPS at a CAGR of 22% over the next 20 years, it could turn a $20,000 investment into $1,000,000. However, maintaining that growth rate might be difficult as it saturates its market and ramps up its spending on its first-party chips.
The company's increased buybacks -- which reduced it share count by 10% over the past five years -- also suggest it's running out of ways to expand its ecosystem and grow its EPS. Therefore, Fortinet might become a slower-growth cybersecurity company like Check Point Software over the next two decades instead of replicating its millionaire-making gains from the past 14 years.
Fortinet still seems like a reliable long-term investment, but it might not make you a millionaire on its own.
