Shares of Fortinet (NASDAQ: FTNT) are down 27% from their 52-week high. The sell-off stems from a string of weaker-than-expected results and slowing sales over the past year.

Despite the recent volatility, investors shouldn’t dismiss this cybersecurity leader that maintains a positive outlook. Let’s explore why Fortinet shares could be poised for a rebound.

The business is in a transitional year

Fortinet’s first-quarter earnings report released in early May (for the three months ended March 31) can be described as mixed.

While total revenue growth of 7.2% and EPS of $0.43 both outperformed Wall Street expectations, the metric that stood out was the 6.4% decline in billings compared to Q1 2023. This contraction in billings, the first since the company’s 2009 initial public offering (IPO), may raise eyebrows in concern but deserves some important context.

A major theme for Fortinet is that it faced a supply chain shortage of networking equipment going back to pandemic-era disruptions through 2022. The result is that as a large backlog of orders was fulfilled into 2023. This created a difficult year-over-year comparison this quarter leading to a decline in billings and 18.3% lower product revenue against the historically strong Q1 2023.

Fortinet has disappointed by not keeping up with the momentum set in place from last year, but billings and product revenue are still higher on a two-year stacked basis.

Fortinet Q1 2024 non-GAAP results.

Image source: Fortinet.

The growth story remains intact

The more encouraging trend for Fortinet is the momentum in its service revenue, which increased by 24% year over year last quarter. The segment now represents 70% of the total business compared to 61% in early 2022.

The shift away from traditional firewall hardware has helped support profitability and cash flow. The gross margin in Q1 at 78.1% climbed from 76.3% in the prior-year quarter. Similarly, efforts to control spending and generate financial efficiencies increased the operating margin by 200 basis points to a first-quarter record of 28.5%.

In terms of guidance, Fortinet expects full-year revenue growth around a midpoint target of 9%. Even billings are seen picking up into the second half of the year and climbing around 1.5% from 2023. The forecast for non-GAAP (adjusted) EPS, between $1.73 to $1.79, represents a 4% increase from the $1.63 reported last year.

These dynamics suggest fundamentals remain solid, with Fortinet managing to navigate a messy start to 2024.

Computer access point being secured by a cybersecurity protocol.

Image source: Getty Images.

Unified SASE is the future of Fortinet

There’s a lot of optimism about the company’s Unified Secure Access Service Edge (SASE) service, as a cloud-based networking and security platform that combines essential networking and security technologies delivered through the cloud. Unified SASE accounted for 24% of total billings in Q1 as a glimpse into the future direction of the company.

The attraction starts with the FortiOS operating system, which leverages the company’s strengths across the entire service and product ecosystem. Customers benefit by sourcing all their secure access solutions from a single vendor.

That includes the integration of new artificial intelligence (AI) tools with FortiAI adding to the value proposition. Fortinet stands to capture market share from smaller competitors offering piecemeal solutions.

Is the stock worth buying now?

There’s a lot to like about Fortinet, which remains well positioned to reclaim stronger growth. The first step to a sustained rally in the stock will be evidence that billings have stabilized, which will be a key monitoring point over the next few quarters.

In terms of valuation, Fortinet is trading at approximately 34 times the midpoint of management’s full-year EPS guidance. While that level can be seen as pricey by some, I believe the current premium is justified, considering the company’s financial strength and leadership position.

For investors who are confident in the company’s long-term potential, the recent stock price sell-off could offer an attractive buying opportunity.

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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Fortinet. The Motley Fool has a disclosure policy.

Down 27% From Its 52-Week High, Is Now the Time to Buy Fortinet Stock? was originally published by The Motley Fool


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