Fortinet Stock Before Q2 Earnings: To Buy or Not to Buy?

Fortinet FTNT is scheduled to report second-quarter 2024 results on Aug 6, after market close.

The cybersecurity firm projects revenues between $1.375 billion and $1.435 billion. The Zacks Consensus Estimate for the same is pegged at $1.40 billion, suggesting year-over-year growth of 8.44%.

The company forecasts second-quarter non-GAAP earnings in the range of 39-41 cents per share. The consensus mark for earnings is pegged at 41 cents per share, implying a rise of 7.9% from the year-ago figure of 38 cents.

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In the last reported quarter, the company delivered an earnings surprise of 13.16%. The company's earnings beat the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 13.58%.

Earnings Whispers

Our proven model predicts an earnings beat for Fortinet this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. FTNT has an Earnings ESP of +3.41% and a Zacks Rank #3 at present.

Factors Shaping Upcoming Results

Fortinet's second-quarter results are expected to be driven by the increasing adoption of its security and networking products in the evolving digital landscape. The company's performance is likely to have been impacted by the ongoing shift to hybrid work environments and the accelerated deployment of digital technologies across industries.

In the Product segment, Fortinet's FortiGate-based secure Software-Defined Wide Area Network (SD-WAN) offerings are anticipated to have been a key growth driver. However, our model projects a year-over-year decline of 18.2% in Product revenues to $386.8 million for the quarter. This could signal a shift in customer preferences or increased competition in certain product categories.

Conversely, the Services segment is expected to have recorded strong growth, fueled by increased demand for FortiGuard security subscriptions and FortiCare technical support services. Our model forecasts Services revenues to reach $1.01 billion, representing a significant 23.4% year-over-year increase.

The global cybersecurity market has been expanding rapidly, providing a favorable backdrop for Fortinet's growth. According to a Global Market Insights report, the SD-WAN solutions market, valued at $7.2 billion in 2023, is projected to witness a compound annual growth rate (CAGR) of over 27% from 2024 to 2032. This growth is attributed to the rising frequency and sophistication of cyber attacks, coupled with increasing IT expenditures. Worldwide IT spending is expected to reach $5.1 trillion in 2024, an 8% year-over-year increase, which could further boost Fortinet's performance.

Fortinet's FortiTrust, a unified solution with a single user-based licensing model for flexible consumption across networks, endpoints, and clouds, has been gaining traction. This is expected to have driven the company's private and public cloud billings.

For the second quarter, Fortinet has provided guidance for Billings in the range of $1.49-$1.55 billion. Our model estimates Billings to reach $1.54 billion, indicating modest 0.5% year-over-year growth.

Price Performance & Valuation

Shares of Fortinet have lost 0.9% year to date and underperformed the Zacks Computer and Technology sector's return of 20.1%. This decline has left investors questioning whether to maintain their positions or consider selling their shares. Fortinet operates in a fiercely competitive cybersecurity market, contending with industry giants like Palo Alto Networks PANW, Check Point Software Technologies CHKP and Cisco Systems CSCO.

Year-to-Date Performance

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Valuation-wise, Fortinet's premium pricing is evident. Its trailing 12-month price-to-sales (P/S) ratio of 8.29X is way ahead of the Zacks Internet Software industry average of 3.02X. This elevated valuation suggests high growth expectations from investors but also implies increased risk.

FTNT's P/S TTM Ratio Depicts Stretched Valuation

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Investment Considerations: Balancing Risk and Reward

Fortinet faces significant challenges stemming from macroeconomic uncertainties and intensifying competition in the cybersecurity sector. Despite these headwinds, Fortinet maintains a strong market position with its integrated security fabric approach, resonating well with enterprise customers. The company's focus on innovation and R&D investment positions it favorably to capitalize on emerging trends like Secure Access Service Edge (SASE) and Zero Trust Network Access (ZTNA).

With the global cybersecurity market projected to reach $308.8 billion by 2024, growing at a 10% annual rate, Fortinet is well-positioned to benefit from this expansion. The company's Security Fabric, an integrated and automated platform, provides comprehensive protection across various digital environments. Fortinet's commitment to innovation, evident in its AI-powered solutions and GenAI assistant, further strengthens its competitive edge in the rapidly evolving cybersecurity landscape.

Final Thought

An analysis of Fortinet's market position reveals a complex picture. While recent challenges have impacted investor sentiment, the company's fundamental strengths and the growing cybersecurity market suggest potential for recovery. Fortinet's comprehensive product portfolio and established customer relationships position it well to capitalize on the increasing prioritization of digital security by organizations worldwide, suggesting that it may be premature to abandon the ship ahead of its second-quarter earnings report. However, new investors may consider waiting for a more favorable entry point for Fortinet, which currently has a Zacks Rank #3 (Hold).

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