Fortinet, Inc. (FTNT) Just Hit it Out of the Park

Fortinet, Inc. (NASDAQ:FTNT) crushed the market’s (and its own) estimates and its full year guidance was above current estimates. The company appears to have hit a sweet spot in the market place with its mix of affordability, performance and sophistication. In summary, Fortinet is now expanding out of its core SMB strength and into larger enterprises where the increasing performance of its solutions are making it attractively priced. In a cautious large enterprise spending market this is the right time for Fortinet to step up.

Fortinet’s Forte

The stock has been weak recently with various commentators and analysts forecasting a weaker outlook going forward. I always think it is a good idea to rationally look at the reasons why they might think this rather than to dismiss these fears with pejorative disdain. Before I go into that, here is a summary of sequential revenue growth plus the mid-point of guidance for the next quarter.

My suspicion is that some analysts were piecing together a jigsaw from what other companies are saying and then producing a picture where the pieces kind of fit but the image is wrong.

For example some of the pieces include

• Palo Alto Networks Inc (NYSE:PANW) gave a strong earnings report but it also cited aggressive pricing competition in the quarter and PANW is primarily US focused
• Check Point Software Technologies Ltd. (NASDAQ:CHKP) recently gave a set of numbers that I found disappointing and its product and license revenue growth has now turned negative
• Fortinet disappointed last time around and reported some relative underperformance in China (in fact this spilled over into this quarter too)

Putting these things together suggests a cautious spending environment where PANW is winning share from incumbents, pricing is becoming an issue, and product growth is hard to come by. Conclusion?  Fortinet will find it tough.

Well it didn’t quite work out like that and here is my best guess why.

Fortinet Hits a Sweet Spot

Going back to what Check Point said it seems that it is in the middle of establishing a new appliance platform and its new products are offering far better performance than the old ones did. However this seems to have spurred customers to buy the cheaper options and this retain the same performance but at a cheaper price. Moreover it is hard not to conclude that CHKP is losing out on wins with PANW being aggressive in the market place. The stock is great value on a cash flow basis and a forward PE of 13.5x, but its prospects continue to be downgraded and product sales growth is now negative.