Fortinet, Inc. (FTNT) Just Hit it Out of the Park

As for Palo Alto it is making a splash in the market and using its IPO money it appears to be investing in sales and marketing in order to grab share from incumbent firewall players like Cisco Systems, Inc. (NASDAQ:CSCO) and Juniper Networks, Inc. (NYSE:JNPR). The takeaway from Fortinet’s conference call is that Cisco and Juniper and falling behind in terms of performance but they are still able to try and sell security as part of an overall solution provided it is bundled with things like switches and routers etc. In other words it is not a core strength of these companies. Indeed CHKP said a similar thing and –if anything- I get the impression that Cisco and Juniper are falling behind in security. Cisco is releasing new products but its growth in security has slowed for the last three quarters on a sequential basis.

According to this article Cisco is minded to make an acquisition in security and looked at Palo Alto before its IPO. If true, it’s questionable whether it would go back now the evaluation is higher. In addition one of Palo Alto’s key strengths is its sales and marketing operations and this is not necessarily an area where Cisco is weak. I think Fortinet is a more likely destination for Cisco’s takeover cash.

In summary, I think CHKP’s product refresh may have placed it outside the sweet spot of what corporations want to spend on (according to Gartner it is known for sophisticated but relatively expensive solutions) and JNPR and CSCO are falling behind. PANW is growing strongly but FTNT believe that it has superior performance in technical based ‘bake-offs’. Indeed it cited deals where it replaced PANW and this is not a great sign for a young fast growing company.

Meanwhile FTNT’s solutions are increasing being adopted by large institutions and it has won a number of contracts against CSCO, JNPR, CHKP and PANW.

Where Next For Fortinet?

I think this company is a genuine takeover target, but is good value in its own right. The full year guidance of EPS of 60-61c may make it look expensive but recall that deferred revenues just grew at over 23% and the forecast for free cash flow is $180-190m putting it on a forward FCF/EV yield of 6.6% as I write. That is far too cheap for a company growing earnings in the mid-teens.

It’s in a sweet spot right now and I would expect that to continue for a while. The question is how long before a cash rich incumbent looks at the company?

The article This Tech Company Just Hit it Out of the Park originally appeared on Fool.com and is written by Lee Samaha.

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