Shares of Fortinet (FTNT -1.24%) have embarked on a remarkable bull run since the beginning of August 2024, jumping nearly 70% since then as of this writing. The move comes on the heels of a string of solid quarterly results that have supercharged the cybersecurity specialist's fortunes on the stock market.
When Fortinet released third-quarter 2024 results in early August, the better-than-expected numbers sent the stock soaring. The company's improved guidance was the icing on the cake as investors cheered its improving margin profile and the growing revenue pipeline.
A similar scenario unfolded when Fortinet released its third-quarter results after the market closed on Nov. 7, with shares of the company jumping almost 10% the following day. Let's see why that was the case and check if this cybersecurity stock is capable of sustaining its red-hot bull run.
Fortinet's earnings are growing at a remarkable pace
Fortinet delivered Q3 revenue of $1.51 billion, an increase of 13% from the same period last year, which was slightly higher than analysts' expectations of $1.48 billion in revenue. However, the company clocked much stronger bottom-line growth as its non-GAAP (adjusted) earnings jumped nearly 54% year over year to $0.63 per share. This was way higher than Fortinet's guidance of $0.51 per share in earnings.
The solid year-over-year jump in Fortinet's earnings can be attributed to a sharp jump in Fortinet's margins last quarter. More specifically, the company's non-GAAP operating margin jumped from 27.8% in the year-ago period to 36.1% last quarter. The impressive growth in Fortinet's margins can be attributed to an increase in the company's services revenue, which carries a superior margin compared to its product revenue.
More specifically, Fortinet's services business carries a gross margin of 88.5% while the product segment's gross margin is 68.4%. As Fortinet's services revenue increased 19% year over year in Q3 to $1.03 billion as compared to the 1.7% growth in product revenue to $474 million, it is easy to see why there was a huge improvement in the company's overall margin.
The services business now accounts for 68% of the company's top line, up from 65% in the same quarter last year. It is worth noting that this business is benefiting from the adoption of Fortinet's fast-growing products that cater to the security operations (SecOps) and unified secure access service edge (SASE) verticals.
SecOps refers to the synergy between an organization's security and operations teams as they shore up cyber defenses and resolve incidents more quickly. Fortinet is trying to make the most of the opportunity in this space by integrating artificial intelligence (AI) tools within its SecOps offerings. On its latest earnings conference call, Fortinet management pointed out that AI-focused SecOps was its fastest-growing product, clocking 32% billings growth and accounting for 10.5% of its overall billings.
Fortinet said that the demand for AI-driven SecOps offerings could hit $163 billion in 2028, growing at an annual rate of 13%. On the other hand, the demand for unified SASE offerings is also forecast to grow at a healthy annual rate of 16% through 2028, generating an estimated $46 billion in annual revenue. That's not surprising as this product allows companies to combine their networking and security offerings into a single platform, enabling organizations to secure both remote and on-premise devices, along with cloud-based data and applications.
Fortinet witnessed a 14% jump in its unified SASE bookings last quarter, while revenue from this segment was up by 27%. The strong showing in the SecOps and the unified SASE segments led to a 15% year-over-year jump in the company's remaining performance obligations (RPO) to $6.1 billion. This metric refers to the total value of a company's unfulfilled contracts, so the faster growth in the RPO suggests that Fortinet's future revenue pipeline is improving.
All this explains why the company raised its full-year forecast. It is now anticipating revenue of $5.89 billion at the midpoint of its guidance range, up from the earlier estimate of $5.85 billion. Non-GAAP earnings for the full year are expected to land at $2.24 per share as compared to $2.02 per share. That would be a 37% jump over last year's earnings of $1.63 per share.
But can the stock deliver more upside?
There is no doubt Fortinet has been clocking healthy earnings growth of late, but the stock has recorded a big jump in a short period. As a result, Fortinet is now trading at almost 49 times trailing earnings, which is a premium to the tech-laden Nasdaq-100 index's earnings multiple of 33. As the following chart shows, investors could have bought this cybersecurity stock at a more reasonable earnings multiple earlier in the year.
FTNT PE Ratio data by YCharts
Consensus estimates are projecting a 20% annual increase in Fortinet's earnings for the next five years. Based on its estimated earnings for 2024, its bottom line could jump to $5.57 after five years. Assuming the company manages to hit the mark and trades at 30 times earnings at that time (in line with the Nasdaq-100 index's forward earnings multiple), its stock price could jump to $167. That would represent a 72% spike from current levels.
So, investors looking for a growth stock can still consider adding Fortinet to their portfolios as it seems to have room for more upside in the long run even after the latest impressive gains.
