Cybersecurity Stock Surges, Promising Double-Digit Gains

Key Points

• Fortinet had another strong quarter, producing record margins and robust cash flow. 
• Shareholder equity has inverted to positive and is expected to improve sequentially as the year progresses.
• Analysts are raising their ratings and price targets, suggesting this stock will hit a new all-time high. 

Fortinet NASDAQ: FTNT stock surged more than 25% following its Q2 release because it reached an inflection point. The company's lean into unified SASE and Security Ops resonates with businesses, providing a simpler approach to cloud-based cybersecurity. It is developing into a market leader, as evidenced by its ranking in Gartner Magic Quadrant reports. The company is the #1 single-source vendor and the only cybersecurity vendor mentioned in all the available half-dozen Magic Quadrant cybersecurity reports. The takeaway for investors is that business is growing, the moat is widening, profits are robust, cash flow is sound, and shareholder value is rapidly improving. 

Among the pertinent details from the report is the balance sheet. The company’s positive cash flow quarter and free cash flow allowed for a substantial build-up in cash and equivalents, improving its net cash position and increasing assets, while liabilities and debts remained flat. The critical detail is that shareholder equity inverted from deficit to $288.2 million and is expected to continue growing as the year and years progress. 

Fortinet Has Beat and Raise Quarter 

Fortinet had a solid quarter, with revenue rising 11% to $1.43 billion compared to last year. The revenue beat the consensus estimate reported by MarketBeat on strength in the critical, higher-margin services segment. Services grew by 20%, offset by a 4.4% decline in products, leading to a substantial improvement in systemwide margin. The only area of concern is the billings, which are flat compared to last year and indicate tighter cash flow. Offsetting that is a 15% increase in deferred revenue, suggesting cash flow will improve with time. 

The margin is impressive. The company widened its gross and adjusted operating margins, with the adjusted margin up 820 basis points. The net result is $0.57 in adjusted EPS or about 4000 basis points of outperformance. Again, the cash flow is a concern because it is down YoY but sufficient to sustain the outlook while allowing the company to reinvest and develop newer technologies. Still, cash flows are sufficient to produce a cash-flow-positive quarter, setting it up to resume share buybacks. The company hasn’t bought back any shares for two quarters but has more than $1 billion available under the current authorization. 

Guidance is the best news in the report. Billings are expected to remain flattish for the quarter, but revenue will grow sequentially and year-over-year to $1.475 billion at the midpoint of guidance. That is above the consensus midpoint and compounded by an expectation for margin strength to continue. Margin will contract from the record level set in Q2 but remain strong at 31% adjusted, producing an expected $0.56 to $0.58 in adjusted earnings. That is more than a dime above consensus, and strength is expected to carry through the year’s end: the full-year guidance was improved at the top and bottom line, putting the low end of the new range above the high-end of the previous. 

Analysts Raise Targets and Lift Sentiment for Fortinet Stock

The analyst response to Fortinet’s news is overwhelmingly bullish. Nearly half of the 33 analysts tracked by MarketBeat issued a revision, including an increased rating, price target, or both. No reduced price targets or sentiment reductions have been recorded, leaving the sentiment at Hold but firming and the range of price targets rising. The consensus assumes a low-single-digit advance from the $70 level but a new all-time high at the range high end. Because more than half the fresh targets are above $75, investors may expect this stock to move into the high end of its trading range with a growing probability for a new all-time high. 

The technical details suggest that this cybersecurity stock will rocket higher. The 25% gain sparked by the Q2 results confirms support at the cluster of moving averages and is compounded by a strong Buy signal in the indicators. The stochastic and MACD converge with the price action and outlook, showing bullish crossovers low in their ranges, leaving ample room for this market to run. The critical resistance targets are near $71 and $80; a move above $70 will likely result in a quick move to $80. A move above $80 will set a fresh all-time high and could lead to a sustained uptrend. The stock price could advance another $30 in that scenario.