I can say that Fortinet (FTNT, Financial) is almost perfect. The GF Score of this cybersecurity company that competes with Crowdstrike (CRWD, Financial) and Palo Alto Networks (PANW, Financial) is 99 out of 100! That indicates outperformance potential.
If you don't know what GF Score is, it is a score made by the GuruFocus team to facilitate investors a quick glimpse of a stock's performance based on five measurements: profitability, valuation, growth and financial strength and stock price momentum. And 99/100 is considered very good. Let's take a look.
Fortinet's revenue grows steadily at 10 year CAGR of 24.7% per year and 5 year CAGR of 27%, from $534 million in 2012 to $5.3 billion in 2023. According to Peter Lynch's theory 27% annual revenue growth is considered fast grower.
For profitability, gross margin stands at 76.7% with a double digit net margin of 23.7%, with strong revenue growth and thick margins I assume that this industry is a high-barrier-entry industry. If not, there would be more competitors to Fortinet and peers that can reduce their sales in the course of 10 years, or at least in the past 5 years where AI and social media are heavily used by more people.
And my google search reveals that cybersecurity is indeed considered a high-barrier-to-entry industry because of some reasons:
- Technical expertise: Creating a team with deep understanding about cybersecurity can be challenging and costly as they are required to comprehend complex technology knowledge and skills.
- Investment: Significant amount of upfront cost is required to fund their research and development, infrastructure and train their talents.
- Regulatory compliance: As they are involved with clients' data, cybersecurity business is heavily regulated especially in finance and healthcare sectors and meeting the compliance requirements can be expensive and complex.
- Customer trust: when it comes to cyber security, the market can be challenging and gaining their trust is not easy, making it difficult for newcomers to stand as competitors to existing companies in the cybersecurity industry.
For financial strength Fortinet only has debt in recent years, before 2021 they have no debt or so small that nearing zero. Below is a chart visualizing the financial strength of Fortinet over time :
For the full year 2023 Fortinet held $2.4 billion of cash and cash equivalent with total debt of only $944 million. The nature of the cybersecurity business requires a thick financial cushion which is necessary to mitigate any unwanted case in terms of cyberattacks. That's why they need a huge pile of cash while they can pay their debt easily just with the cash.
And for the valuation with $80 per share, Fortinet's price to earning ratio stands at 46.9x compared to the industry median of 26.59x Fortinet is at an expensive valuation. The DCF valuation also suggests that Fortinet's current price is overvalued. But with such quality I see why people tend to hold this stock.
Why is it not perfect?
With that growth, thick margins, thick financial cushion but slightly overvalued, it would be perfect if Fortinet also distributed dividends. Unfortunately Fortinet doesn't pay dividends.
So investors can only expect capital gain from Fortinet and that's still good. With such quality, anytime the price drops I will definitely put it into my basket of portfolio. What about you?
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