Technology stocks have done well over the past year. this is, Nasdaq 100 Technology Sector Index for this period. But not all tech stocks have benefited from the overall market rally. fortinet (NASDAQ:FTNT) is one of them.
The cybersecurity company's stock price has fallen 11% over the past year, and its most recent quarterly results (Q1 2024) didn't help matters. Before we take a closer look at the catalysts that could help Fortinet regain its momentum, let's take a look at why.
Fortinet investors are concerned about its lukewarm growth
First-quarter sales were $1.35 billion, up just 7% year over year, and adjusted net income was $0.43 per share, up 26%. The numbers beat Wall Street's expectations, as analysts had expected Fortinet to post earnings of $0.38 per share on revenue of $1.34 billion. However, the issue was with Fortinet's billing during the quarter.
Billings in the last quarter fell more than 6% year over year to $1.41 billion, missing the consensus estimate of $1.43 billion. Management noted that “billings drive current and future revenues” and said the metric is “an important indicator of the health and viability of our business.” Therefore, the company's revenue contraction does not bode well, which explains why Fortinet stock fell after the earnings release.
Further, the guidance for flat billing in 2024, compared to the 14% growth Fortinet recorded last year, further adds to the downside of investor sentiment. This explains why the company's sales growth is expected to slow significantly this year. Fortinet's revenue outlook for this year is his $5.8 billion, representing a modest 9% year-over-year increase. For comparison, the company's sales in 2023 increased by 20% to $5.3 billion.
All in all, it's easy to see why investors are hitting the panic button and stocks are underperforming. However, there were some positive outcomes in the last quarter that could once again accelerate growth. Let's take a closer look at them.
Focus on generative AI could boost company's growth
The emergence of generative artificial intelligence (AI) will have a significant impact on the cybersecurity industry in the long term. According to Bloomberg Intelligence, spending on AI cybersecurity generated is expected to increase from just $9 million in 2022 to $3.2 billion in 2027. By 2032, the market size could soar to almost $14 billion.
Companies already offering generative AI-based cybersecurity are growing at an incredible pace. This market is currently in its early stages of growth and is expected to grow at an annual growth rate of 109% until 2032. So it's not too late for Fortinet to enter this market.
Last year, the company released FortiAI, a generative AI cybersecurity assistant, and recently added several updates to the platform to help security analysts strengthen their organizations' cyber defenses and accelerate threat detection and analysis. .
Management says FortiAI is being “deployed in both networking and security products,” and that the company's partners and customers are showing interest in the AI it produces.
As Fortinet continues to roll out these tools across its platforms and more customers begin to adopt them, the company's growth could accelerate. Perhaps this explains why analysts expect revenue growth to improve in the coming years after this year's flat performance.
The company's stock currently trades at 8.6 times sales, which is lower than the average sales multiple of 10.5 times over the past five years. Assuming growth accelerates, it wouldn't be surprising to see the stock price approach its five-year average sales multiple in the future. Therefore, if Fortinet's sales do indeed reach $7.5 billion in 2026 and its sales multiple reaches 10x, the company's market cap could jump to $75 billion.
This is a 63% increase from current levels and shows that this cybersecurity stock has the potential to deliver healthy returns over the next three years, thanks to catalysts such as AI. Given that Fortinet is currently trading at relatively lower levels than before, investors should buy Fortinet during downturns because Fortinet could rise in the long run. would be a good idea.
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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has a position in and recommends Fortinet. The Motley Fool has a disclosure policy.
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