Fortinet (FTNT)

We've been bullish on FTNT ever since we began covering the stock in November 2019. FTNT has had a long and unwavering commitment to developing its own custom silicon, an endeavour unimitated by any other vendor originating in cybersecurity. Co-founder and CEO, Ken Xie, envisaged a long time ago that standard CPUs would eventually be inadequate for processing computationally intensive security functions. And this was why he set FTNT on the path to developing its own ASIC chip, specialized for processing decryption/encryption and inspecting high throughput of packets. As a result, FTNT's FortiGate now has 5x to 10x more computational power than the industry average, delivering market-leading TCO (Total Cost of Ownership) and performance for customer orgs.

Xie also envisioned that if security and networking could converge, it would generate synergies for orgs, bring down their overheads, and the networking insights could improve security and vice versa. Hence, part of the custom silicon endeavour has been to build a SoC (System-on-Chip) that incorporates all the necessary security and networking functionality (i.e., router, switch, firewall, IPS/IDS, SWG, load balancer, VPN, etc.) into one device, known as its FortiGate.

Along with the custom silicon development, the other strategic decision was to maximally utilise software-defined technologies. In essence, this is the leveraging of virtualisation in order to decouple the software from the underlying hardware. This opened the door for FTNT to enter the SD-WAN space and become an unlikely next-gen networking player.

With FTNT, orgs can now experience ultra high security and networking performance thanks to the specialised silicon, and can easily maintain and upgrade the software thanks to the SD-WAN. In other words, they have a high performance data plane that can be easily managed by a central control plane.

FTNT is completely unique in having this level of compute, security, and SD-WAN, natively all in one box - that can be deployed on-prem or at greater scale off-prem. And it positions the company to take full advantage of trends such as SASE and ZTA that will increasingly rely on lower network latencies, and trends such as SecOps/NetOps convergence that need better control planes to coordinate the two groups' activities and insights.

Financially, FTNT is also rather rare. Since 2019, the company has accelerated growth from c. 20% to c. 30% at a current revenue run rate of nearly $4bn, mainly benefitting from the demand from large enterprises that have complex hybrid needs, that see the synergies of merging security and networking, and that also want some vendor consolidation. FTNT also has presence in cloud security and endpoint security that has supported growth. Despite the growth, the company has maintained mid-70s gross margin and c. 20% operating margin.

Along with Palo Alto Networks (PANW), FTNT's extremely broad security and networking platform will benefit from the various tailwinds driving the cybersecurity industry. SD-WAN has been generating a lot of hybrid business, and this looks set to continue as orgs environments become increasingly complex, though, the higher growth opportunity is around less-modernized industries (manufacturing, for example) digitalising their plant operations. This is referred to as OT (Operational Technology), and as these firms bring more assets online, inevitably they become more vulnerable to attack. FTNT has a suite of OT solutions to help such orgs secure themselves more cost effectively than alternative vendors. Furthermore, most traditional IT security vendors have not even begun targeting OT as a revenue source, which puts FTNT in an advantageous position.  

Therefore, we think FTNT has a durable runway of growth ahead and the expectation is that further operating leverage will increase profit margins over time. For a company consistently delivering an elite Rule of 40 with a good blend of growth and margin, it currently looks undervalued. Perhaps our relative bullishness implies we believe FTNT has a more durable growth outlook that the market does. Though, given FTNT's prime competitive positioning, the industry tailwinds, and its in-house ability to quickly innovate and adapt, we're sticking with our long-term conviction.

For institutional investors, on request, we can do tailored research or memos into any specific aspect of FTNT. For all types of investors, here are individual reports either solely focused on FTNT or including FTNT to some degree.

For institutional inquiries please email [email protected] for more information.


Fortinet Equity Research Report (January 2020)

Fortinet Investment Synopsis (April 2021)

Which Cybersecurity Stocks Should You Buy? (June 2021) - Free

Follow-Ups: Fortinet, Multiple Secular Tailwinds & Significant Relative Mispricing (December 2021)

The Ultimate Investor Guide To Zero Trust (January 2022) - Free

A Technical Overview Of Segmentation – The Panacea To Stopping Ransomware (January 2022)

Tailored research/memo - price negotiable

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