Tech stocks have been in good shape over the past year, as evidenced by the 50% gains recorded by the Nasdaq-100 Technology Sector index during this period. But not all technology stocks benefited from the sharp rise in the market as a whole. Fortinet (NASDAQ:FTNT) is one of them.
Shares of the cybersecurity company have fallen 11% over the past year and the latest quarterly results (for the first quarter of 2024) haven’t helped matters either. Let’s explore why, before taking a closer look at the catalysts that could help Fortinet regain its momentum.
Fortinet investors worry about its slow growth
First-quarter revenue rose just 7% year-over-year to $1.35 billion, while its adjusted net income rose 26% to $0.43 per share. The numbers beat Wall Street’s outlook, with analysts expecting Fortinet to generate earnings of $0.38 per share on revenue of $1.34 billion. The problem, however, lay with Fortinet’s billings during the quarter.
Billings fell just over 6% from a year ago to $1.41 billion last quarter, missing the consensus estimate of $1.43 billion. Management emphasized that “billings determine current and future revenue” and that the metric is “an important indicator of the health and viability of our business.” The contraction in the company’s billings therefore does not bode well, and this explains why Fortinet shares fell after the publication of the results.
Additionally, Fortinet’s forecast for stable billings in 2024 compared to the 14% growth recorded last year further reinforced negative investor sentiment. This explains why the company’s revenue growth is expected to slow significantly this year. Fortinet’s revenue forecast of $5.8 billion for this year indicates an increase of just 9% from last year. For comparison, the company’s revenue jumped 20% in 2023 to $5.3 billion.
Overall, it’s easy to see why investors hit the panic button and why the stock has underperformed. However, there were some positive developments in the last quarter that could help accelerate growth again. Let’s take a closer look at them.
Focus on generative AI could drive company growth
The advent of generative artificial intelligence (AI) is going to have a massive impact on the cybersecurity industry in the long term. According to Bloomberg Intelligence, spending on generative AI cybersecurity is expected to increase from just $9 million in 2022 to $3.2 billion in 2027. By 2032, the size of this market could reach nearly 14 billions of dollars.
Companies that already offer cybersecurity based on generative AI have been growing at a rapid pace. The market is currently in its early stages of growth and is expected to achieve an annual growth rate of 109% until 2032. So it is not too late for Fortinet to enter this market.
The company launched its generative AI cybersecurity assistant FortiAI last year and recently added several updates to the platform to help security analysts strengthen their organizations’ cyber defenses and accelerate the detection and analysis of attacks. threat.
Management says FortiAI is “being deployed across networking and security products,” and the company’s partners and customers have expressed interest in its generative AI.
As Fortinet continues to roll out these tools on its platform and more customers begin to adopt them, the company could see an acceleration in its growth. This likely explains why analysts expect revenue growth to improve over the next two years, after this year’s stagnation.
The stock currently trades at 8.6 times sales, which is a discount from its five-year average sales multiple of 10.5. Assuming its growth accelerates, it won’t be surprising to see the stock move closer to its five-year average sales multiple in the future. So, if Fortinet’s revenue actually reaches $7.5 billion in 2026 and its sales multiple reaches 10, the company’s market capitalization could rise to $75 billion.
This would represent a 63% increase from current levels, indicating that this cybersecurity stock could generate significant gains over the next three years thanks to catalysts such as AI. Given that it’s currently trading relatively cheaper than before, investors would do well to buy Fortinet while it’s struggling, as it appears capable of flying higher in the long term.
Should you invest $1,000 in Fortinet right now?
Before buying Fortinet stock, consider this:
THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now…and Fortinet was not one of them. The 10 stocks selected could produce monster returns in the years to come.
Consider when Nvidia made this list on April 15, 2005…if you had invested $1,000 at the time of our recommendation, you would have $566,624!*
Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THE Equity Advisor the service has more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns May 13, 2024
Hard Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions at and recommends Fortinet. The Mad Motley has a disclosure policy.
1 Stock Down 11% to Buy Before Artificial Intelligence (AI) Can Accelerate Its Growth and Skyrocket was originally published by The Motley Fool
