The use of artificial intelligence (AI) systems in the cybersecurity industry is growing at a nice clip. Last year, AI-focused cybersecurity spending stood at an estimated $24 billion, but this figure is expected to be nearly $134 billion in 2030, according to a forecast by Statista.
As such, now would be a good time for investors to buy shares of cybersecurity companies that are aggressively integrating AI tools into their platforms. Fortinet (FTNT 0.23%) is one such company, leveraging AI to drive stronger growth in its business.
Fortinet's revenue pipeline is improving thanks to AI
Fortinet brought in $5.3 billion in revenue in 2023, an increase of 20% over the previous year. However, its deferred revenue increased at a faster pace of 24% to $5.74 billion. Deferred revenue refers to the money collected in advance by a company for services that will be rendered at a later date. It's recognized as revenue only after the services are delivered.
So, the faster growth in the company's deferred revenue is an indication that demand for its subscription-based cybersecurity services is robust. This is also evident from the fact that Fortinet's services revenue was up 28% in 2023 to $3.38 billion, accounting for 64% of its top line.
Fortinet credited the solid growth in its services business to the strong demand for its subscriptions related to security operations and secure access service edge (SASE) offerings. It is worth noting that the company has integrated AI into both these platforms. For instance, Fortinet's AI-focused security operations platform allows customers to quickly detect and respond to threats. What's more, Fortinet management points out that it has been using AI to enhance its offerings for a long time.
As CEO Ken Xie said on the Q4 conference call:
We have invested heavily in AI across every function and product. For over a decade, Fortinet has used machine learning and AI to provide advanced threat intelligence across more than 40 products from network, end point and application security. Our solutions apply AI and ML across the expanded digital attack surface automatically containing and remediating incidents within seconds, where the industry averages for detection and remediations takes several days.
Even better, the company has started using generative AI to bolster its cybersecurity platform. It launched a generative AI cybersecurity assistant in December with the intention of helping organizations "make better decisions, rapidly respond to threats, and save time on even the most complex tasks."
All this explains why Fortinet is witnessing a nice improvement in the number of cybersecurity deals it's inking. In 2023, the company struck 13 deals worth $10 million or more, a 160% jump over the previous year. Additionally, it landed 474 deals worth $500,000 or more in the fourth quarter of 2023, up significantly from the 367 such deals it struck in the third quarter.
Given that Fortinet expects its total addressable market to jump to $208 billion in 2027 from $150 billion this year, its deal momentum should remain strong, especially considering its focus on using AI to improve its services. Not surprisingly, analysts are expecting its bottom-line growth to accelerate in 2025 and 2026 following this year's forecast jump of just 4% from 2023 levels of $1.63 per share.
FTNT EPS Estimates for Current Fiscal Year data by YCharts.
Investors can expect more upside from this cybersecurity play
Fortinet stock has gained 16% so far in 2024. It is currently trading at 46 times earnings, which is a discount to its five-year average earnings multiple of 56. Its forward earnings multiple of 42 points toward an improvement in its bottom line this year, and is lower than its five-year average of 44.
However, Fortinet's earnings growth is expected to improve in 2025 and 2026, which explains why the market could be rewarding it with a premium valuation. But if Fortinet delivers $2.47 per share in earnings in 2026, as analysts predict, even if it trades after three years at just 40 times earnings, its stock price could hit $99. That would be a 45% increase from current levels, which is why investors should consider buying this cybersecurity stock now.
