The Unsexy Side of Tech That is Firing on All Cylinders

By Ryan Guenette - August 29, 2012 | Tickers: CHKP, FTNT, PANW, FIRE, SYMC | 0 Comments

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Technology is a common topic of discussion on Wall Street. As Apple has pushed to new all-time highs, becoming the largest company in the history of man, not taking into account inflation, Google has also made news driving higher. Facebook has plunged to new all-time lows as millions of shares were sold by insiders that bought into the company when MySpace was still the king of social. Zynga, Groupon, and Pandora have all broke out to the downside as analysts have questioned the integrity of their business models. However, little to nothing has been said about the internet security names. One of the largest and most prominent players in this industry is Fortinet Incorporated (NASDAQ: FTNT).

Over the past year Fortinet has rallied 46.47%, over a time period in which the S&P 500 has only risen 24.78%. Valued at around $4 billion dollars, Fortinet provides network security solutions. So will this internet security company protect your capital?

Remarkable Fundamentals

In 2009, Fortinet reported sales of $252 million. In 2014, the average analyst consensus believes the company will derive $724 million in sales from its business operations. This represents an increase of 187.30% over just 5 short years. Based on these statistics, the company’s compound annual growth rate (CAGR) is 23.50%, a tremendous feat for a company of any size. Fortinet’s sales growth is consistent, rising each and every year during this period. However, the earnings of the company during this period are more volatile. From 2009 to 2014 the company’s earnings per share is projected to expand only 43.59%. If Fortinet is able to clean up its margins and make its business more efficient, it will be able to derive more earnings from its sales. A large portion of Fortinet’s sales are being reinvested back into the business, through research and development, allowing the company to remain a trailblazer in its respective field. At the current moment Fortinet does not pay out a dividend and has not expressed any plans to do so in the future. From this we can see Fortinet’s magnificent financial resolve, annualized double digit sales growth rate, and dedication to remaining the best at what it does.

The chart below displays Fortinet’s sales, operating profit, net income, net margin, operating margin, and earnings per share over the coming years.

Internet Security Is Becoming Crucial

In this highly competitive global market, it is becoming increasingly essential for businesses to use the full capabilities of the internet. Companies must use social media to connect with their customers, utilize analytics to make important decisions, and make announcements, reports, and presentations through Microsoft Office. Without utilizing the capabilities of computing, businesses will quickly fall behind. However, when companies are on the internet and are using computers, they are subject to attack, known as cybercrime. Billions of dollars are stolen from consumers and corporation alike every year due these attacks. Fortinet and other security companies provide protection to these companies and consumers. The demand for security software is only set to skyrocket as more and more is stolen through cybercrime. According to a recent report, about 34% of 3,877 businesses in 78 countries stated they had been victims of cybercrime. This latest survey shows that cybercrime is almost as widespread as accounting fraud or corruption. The chart below displays the amount of cybercrime versus the amount of security software sold.

In conclusion, Fortinet is in a fast growing industry that will only expand as the world becomes more computerized.

Who is The Most Secure Company in the Industry?

Compared to some of some of Fortinet’s most prominent competitors, such as: Palo Alto Networks Incorporated (NYSE: PANW), Sourcefire Incorporated (NASDAQ: FIRE), Check Point Software Technologies Limited (NASDAQ: CHKP), and Symantec Corporation (NASDAQ: SYMC), Fortinet relates moderately favorably.    

In terms of growth, Palo Alto Networks leads the industry, while Symantec is the sector laggard. No companies in the industry pay out dividends, and none have expressed any plans to do so in the future. In the fundamental ratio comparison, Sourcefire appears to be vastly overpriced, while Stmantec appears to be trading at a bargain price. When growth is taken into account, Palo Alto Networks trades at a hefty premium, while Checkpoint Software trades at the most reasonable multiple. In the net profit margin comparison, Palo Alto Networks stands out to the downside, while Checkpoint Software stands out to upside.

The Foolish Bottom Line

Consumers and corporations alike are becoming increasingly dependent on the internet and computers. With this dependence comes a growing vulnerability to cybercrime. Fortinet caters to this need, and should experience significant expansion from this trend. Additionally, Fortinet possessing incredible financial strength, a double digit sales growth rate, and large amount of money that is reinvested back into the business each year. The foolish bottom line is that too much is said about social media stocks, yet not enough said about internet security names, such as Fortinet.    

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