Fortinet Inc (FTNT, Financial) has been experiencing some turbulence in the stock market with a daily loss of 2.5% and a 3-month loss of 18.66%. Despite these figures, the company's Earnings Per Share (EPS) stands at 1.33. The question that arises now is whether the stock is modestly undervalued or not. This article aims to provide a comprehensive valuation analysis of Fortinet (FTNT), offering insights into its financial health and growth prospects. So, let's dive in!
A Brief Overview of Fortinet Inc (FTNT, Financial)
Fortinet is a California-based cybersecurity company specializing in network security, cloud security, zero-trust access, and security operations. With over 500,000 customers worldwide, it generates a majority of its revenue through subscription and support-based services. As of September 19, 2023, Fortinet's stock price stands at $58.94, while its GF Value, an estimation of its fair value, is $80.24. With a market cap of $46.30 billion and sales amounting to $5 billion, the company presents a compelling case for valuation analysis.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated considering three key factors: historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line provides a visual representation of the stock's fair trading value. If the stock price is significantly above the GF Value Line, it is considered overvalued and may yield poor future returns. Conversely, if it is significantly below the GF Value Line, it is likely undervalued, suggesting higher future returns.
For Fortinet (FTNT, Financial), the GF Value indicates that the stock is modestly undervalued. This suggests that the long-term return of its stock is likely to be higher than its business growth.
Fortinet's Financial Strength
Before investing in a company, it's crucial to assess its financial strength. Companies with poor financial health pose a higher risk of permanent loss. A good way to gauge a company's financial strength is by looking at its cash-to-debt ratio and interest coverage. Fortinet boasts a cash-to-debt ratio of 3.34, better than 53.29% of 2753 companies in the Software industry. Its overall financial strength is rated 7 out of 10, indicating fair financial health.
Profitability and Growth of Fortinet
Investing in profitable companies carries less risk, particularly those with consistent profitability over the long term. Fortinet has been profitable for 10 of the past 10 years, with revenues of $5 billion and Earnings Per Share (EPS) of $1.33 in the past 12 months. Its operating margin of 23.5% is better than 91.75% of 2751 companies in the Software industry. Overall, GuruFocus ranks Fortinet's profitability as strong.
One of the most important factors in the valuation of a company is its growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. Fortinet has an average annual revenue growth of 30.4%, ranking better than 84.78% of 2412 companies in the Software industry. Its 3-year average EBITDA growth is 37.7%, ranking better than 83.47% of 2009 companies in the Software industry.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) with its Weighted Average Cost of Capital (WACC) offers another perspective on its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, ROIC should be higher than WACC. For Fortinet, the ROIC for the past 12 months is 22.97, and its WACC is 12.12.
Conclusion
In conclusion, Fortinet (FTNT, Financial) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 83.47% of 2009 companies in the Software industry. To learn more about Fortinet stock, you can check out its 30-Year Financials here.
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