Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Do Firewalls Make Money at Fortinet?

Fortinet Inc. (NASDAQ: FTNT) is a collateral beneficiary of the cloud-computing and work-from-home booms that COVID-19 is driving.

Fortinet (FTNT) builds network firewalls, data center firewalls, next-generation firewalls, and other security solutions for the cloud. In addition, to firewalls, Fortinet offers security-driven networking, Threat Assessment, AI Driven Security Operations, Zero-Trust Access, Application Delivery, Advanced Threat Protection, Endpoint Security, Telework and Remote Worker Security Solutions, and Web Application Security.

Fortinet can deliver security solutions in hardware (appliances), the Virtual Machine, and the cloud.  Thus Fortinet can offer security solutions for remote workers through the cloud, or installed on their company laptops.

Is Fortinet Making Money?

Fortinet (NASDAQ: FTNT) makes some money. It reported a quarterly operating income of $169.40 million and a quarterly gross profit of $581 million on December 31, 2020.

In 2020, the quarterly operating income grew from $117.80 million on December 31, 2019. Meanwhile, the quarterly gross profit grew from $473 million on December 31, 2019.

Stockrow estimates Fortinet’s revenues grew by 21.81% in the quarter ending on December 31, 2020. Fortinet posted four quarters of double-digit revenue growth in 2020.

It began the year with a revenue growth rate of 21.07% on 31 December 2019. The revenue growth rate rose to 22.07% on 31 March 2020, fell to 17.98% on 30 June 2020, and rose to 18.79% on 30 September 2020.

Notably, Fortinet’s quarterly revenues grew from $613 million on December 31, 2019 to $748 million on 31 December 2020. Thus, Fortinet is a growing company that makes money, which makes it better than many cloud companies.

How Much Cash Does Fortinet Generate?

Fortinet’s quarterly operating cash flow grew from $190.40 million on 31 December 2019 to $296.50 million on 31 December 2020.

Fortinet (FTNT) finished 2020 with a quarterly ending cash flow of $179.50 million on 31 December 2020. The quarterly ending cash flow fell from $626.10 million on 31 March 2020 and $290.30 million on 30 June 2020. The quarterly ending cash flow rose from -$34.10 million on September 30, 2020.

Appealingly, Fortinet has paid off enormous amounts of debt in 2020. For instance, Fortinet reported six straight quarters of negative financing cash flows on 31 December 2020.

In 2020, Fortinet’s negative quarterly financing cash flow peaked at -$920.40 million on 31 March 2020 and fell to -$52 million on 31 December 2020. Interestingly, Stockrow reports Fortinet reported no long-term debt on 31 December 2020. Instead, Fortinet reported $1.359 billion in total non-current liabilities and $3.189 billion in total liabilities on 31 December 2020.

What Value Does Fortinet have?

On 31 December 2020, Fortinet (FTNT) offered some value with $1.837 billion in cash and short-term investments and $4.045 billion in Total Assets.

In 2020, the cash and short-term investments fell from $2.065 billion on 31 December 2019. Conversely, Fortinet’s Total Assets grew from $3.879 billion on 31 December 2019.

On other hand, I think Mr. Market overvalued Fortinet at $167.69 on 18 February 2021. Though I think Fortinet is a good growth stock because its share price grew from $119.45 on 18 February 2020. Thus, I think Mr. Market does not grossly overvalue Fortinet.

I think value investors need to watch Fortinet but avoid it because the stock pays no dividend. I consider Fortinet a possible value investment in a growing market.

Is Cloud Security a Growing Market?

The demand for cloud security is high. Check Point estimates that leaders at 69% of organizations fear data loss or data leakage in the cloud.

Notably, 82% of executives admit their organizations’ existing security tools are ineffective on public clouds, Check Point and Cybersecurity Insiders estimate. Moreover, the  2020 Cloud Security Report estimates that 52% of executives think the risk of security breaches is higher in the cloud.

Finally, 59% of executives think their organizations’ cloud security budgets will grow in 2021. On average, organizations allocate 27% of their security budget to cloud solutions.

In conclusion, cloud security is a growing business and Fortinet (FTNT) is well-positioned to cash in on that growth. Investors seeking value in the cloud need to investigate Fortinet.