Is Fortinet Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals, and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Fortinet (FTNT +2.27%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Fortinet's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Fortinet's key statistics:

FTNT Total Return Price data by YCharts.

Source: YCharts. *Period begins at end of Q1 2010.

FTNT Return on Equity data by YCharts.

Source: YCharts. *Period begins at end of Q1 2010.

How we got here, and where we're going
Fortinet got off to a hot start, but it was tripped up by margin shrinkage, as the company's costs appear to be rising faster than its sales. That isn't enough to call this stock stale, but Fortinet earned only three out of seven passing grades. However, the company could gain a much better score next time around by focusing on the costs of doing business. How might Fortinet push its profit margins even higher over the next few quarters?

Fortinet has experienced a heightened level of cautiousness among its international customer base because of the financial turmoil roiling across Europe. That could be a worrisome portent of things to come, because the company is quite reliant on overseas customers -- almost three quarters of its revenues come from outside the U.S. That's less of a concern for competitors Sourcefire and Palo Alto Networks, which generate 33% and 40% of their business overseas, respectively, but it's also less of an opportunity for those companies.

Hackers and whistle-blowing employees have lately threatened not only business security, but national security, as well, highlighting the need for the protective measures that are Fortinet's specialty. Companies already spend billions to secure their computer networks and mitigate damage done by intruders, but it's never quite enough. Consequently, Fortinet is currently focused on gaining traction with large enterprises, primarily to handle cloud-based and mobile security. In addition to this, Fortinet recently acquired Coyote Point Systems, which provides application delivery control technology. Competitor Palo Alto has its own unique security technology, including the WildFire antivirus solution, and GlobalProtect firewall. The two companies might even benefit from a closer relationship, as they currently combine for less than $7 billion in market cap, less than half that of Symantec, the largest dedicated computing security company on the market.

According to the International Data Corporation, Fortinet has the largest year-over-year revenue growth (16.6%) among the top five network security-appliances vendors. That offers a potential buying opportunity for growth investors with a long-term view, but revenue alone won't cut it. Fortinet's got to control its costs to become a true cash-spinning technology superstar.

Putting the pieces together
Today, Fortinet has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.