The past year has been a rewarding one for Fortinet (FTNT -0.71%) investors. Share prices of the cybersecurity specialist recorded impressive gains of 74%, comprehensively beating the comparable 17% gains recorded by the tech-laden Nasdaq Composite index.
However, Fortinet's quarterly results for the first quarter of 2025 (released on May 7) sent the stock price into a tailspin the following day. Though the cybersecurity company's revenue and earnings exceeded Wall Street's expectations, investors were not impressed by the lukewarm guidance.
Let's take a closer look at Fortinet's business and check if the recent weakness in the stock could be a buying opportunity for savvy investors looking to add a growth stock to their portfolios.
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Fortinet benefits from a couple of solid opportunities in the cybersecurity space
Fortinet's Q1 revenue increased an impressive 14% year over year, while its adjusted earnings jumped at a much faster pace of 35%. The company's impressive growth was driven by the healthy demand for its unified secure access service edge (SASE) and security operations platforms.
Unified SASE is a platform that integrates both networking and security solutions such as zero-trust access, firewall-as-a-service, cloud security, and other features into a single solution. The unified nature of this platform means that customers can use a single vendor, such as Fortinet, instead of tapping multiple vendors, allowing them to have greater control over their cybersecurity system while also lowering operating costs.
Not surprisingly, Fortinet's unified SASE business is growing at a faster pace than its overall business. This was evident from the 19% year-over-year growth in the remaining performance obligations (RPO) of Fortinet's unified SASE business last quarter, which outpaced the 12% growth in the overall RPO of the company.
RPO refers to the total value of a company's contracts that are yet to be fulfilled. So, the faster growth in unified SASE RPO means that Fortinet is getting more contracts for this business than it can fulfill right now. What's more, a similar scenario is unfolding in the security operations (SecOps) business, where the company's RPO increased by 18% from the prior-year period.
SecOps is the integration of an organization's cybersecurity and IT operations to help resolve security incidents at a faster pace and build a more resilient cyber defense. The size of this market is expected to nearly double over the next decade, generating $84 billion in annual revenue in 2034. So, Fortinet can continue to see robust growth in this segment going forward.
Notably, SecOps and unified SASE together accounted for nearly a third of Fortinet's total RPO of $6.5 billion last quarter. The sizable addressable opportunity in these markets suggests that Fortinet's RPO growth could improve in the future and further strengthen the company's revenue pipeline.
Investors would do well to take a look at the bigger picture
Fortinet expects $1.62 billion in revenue in the current quarter, which is a shade below consensus expectations. The top-line forecast points toward a potential jump of 13% from the year-ago period, which represents a slight slowdown from Q1. However, William Blair analyst Jonathan Ho believes that Fortinet may have been conservative in its guidance despite the favorable growth trends it is riding on.
Additionally, Fortinet management pointed out on the latest earnings conference call that it expects to benefit from a "record firewall upgrade cycle" that's expected to gain momentum in the second half of the year. So, it won't be surprising to see Fortinet raising its guidance as the year progresses. Analysts have already raised their earnings guidance for 2025 and 2026, and they are expecting Fortinet's earnings to grow at a faster pace in 2027.
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However, the only reason why investors are likely to stay away from Fortinet right now is its expensive valuation. The stock trades at 42 times earnings, which is expensive when compared to the tech-laden Nasdaq-100 index's earnings multiple of 29. Moreover, Fortinet has an identical forward earnings multiple as its bottom line is expected to grow in the single digits this year, as the additional factors that boosted its bottom line in 2024 are absent in 2025.
So, investors would probably want to wait for a better entry point or look for signs of an improvement in Fortinet's performance going forward, as the strong rally in this cybersecurity stock in the past year has brought its valuation to levels that need a much stronger growth profile to justify.
