Fortinet (NASDAQ:FTNT)

Looking at Fortinet.

I worked on this report for four days now. And I also had to reverse it to a draft since I changed the graphs. Also, the purpose of this exercise is to generate a template that with little input data can evaluate a bunch of companies within an industry and find me the very good ones and also the very bad ones. It also helps me to understand the ratios in the financials to make companies comparable across he sector or even industries. percentages work pretty well doing that! I am an Electrician by trade and a general contractor before, I love numbers. Numbers dont lie. People lie, almost always. ....

Fortinet was founded in 2000. IPO 2009. 11 years on the market. A relative young company. A global player in cyber security and AI.

Potential Catalysts:

• Most of Fortune 500 companies are customers
• It has access to large corporations and governments
• Analyzing 10 billion events through AI and Machine Learning systems, daily.
• The founder is still part of the company.
• Cloud cyber security with AI
• Integrated platforming for various cybersecurity components.
  
  

Key Industry Takeaways 

× We expect spending in the cybersecurity market to remain elevated as regulations severely ratchet up data breach fines and malicious actors attempt to benefit from the latest networking trends to expose entities with outdated security postures. We think the $100 billion-plus cybersecurity market will grow at a five-year CAGR of 9%, and we expect certain areas, such as security for cloud-based workloads and applications, alongside automation solutions, to outpace more traditional offerings. In our view, some vendors will benefit disproportionately, and this rising tide will not lift all boats. 

× The amalgamation of on-premises and cloud-based resources into hybrid-cloud networks, plus software as-a-service applications and mobile users being ubiquitously connected, forever changed the security perimeter. This has spurred new ways to develop threats, including cybercrime as a service. In turn, new opportunities have developed for on-premises security vendors to proliferate their offerings outward and the creation of born-in-the-cloud security vendors. As more entities suffer breaches through their public cloud instances or by mismanaging their cloud-based resources, we believe the realization that public cloud security is a shared responsibility will be a boon for the established security vendors. 

× We believe that the cybersecurity vendor landscape will be shaped by success in three major themes: security for hybrid-cloud ecosystems, cybersecurity platforms, and automation.

Source:

https://ws.questrade.com/researchdata/1.0/reports/download/956885_500.pdf

Key Company Takeaways 

× We believe that Palo Alto Networks is using its leadership position in firewalls, the largest portion of product-based cybersecurity expenditures for entities, and its cybersecurity platform approach as a springboard to gain wallet share for cloud-based security. Its focus on developing and supplementing security teams with automation capabilities to alleviate pain points will be a difference maker, in our view. 

× Cisco Systems' interweaving of security and networking solutions as a one-stop shop for IT teams should keep it as a formidable player. While security is only a fraction of the overall company, we believe that the building out of a security platform to span the needs of on-premises networks and cloud resources makes Cisco well positioned. 

× Firewall players Check Point Software Technologies and Fortinet are building out their security platforms to include solutions for cloud concerns. We expect both narrow-moat companies to remain industry stalwarts but to be less aggressive in the push to diversify into cloud-based security and automation. 

× Being born in the cloud for the networking environment of the future has made Zscaler a disruptive force in the security market. In our view, Zscaler will remain a mainstay in cloud security and is evolving its portfolio to contend with established players attacking its beachhead. 

× No-moat FireEye and NortonLifeLock have not carved out sustainable competitive advantages, and we do not have confidence in their ability to deliver excess returns on invested capital. FireEye's sandboxing 

https://ws.questrade.com/researchdata/1.0/reports/download/EQR_0P0000L1GP.pdf

What are the financials saying?

Benzinga Fortinet (NASDAQ:FTNT) reported quarterly earnings of $1.06 per share which beat the analyst consensus estimate of $0.97 by 9.28 percent. This is a 39.47 percent increase over earnings of $0.76 per share from the same period last year. The company reported quarterly sales of $748.00 million which beat the analyst consensus estimate of $722.36 million by 3.55 percent. This is a 21.74 percent increase over sales of $614.40 million the same period last year.

What I like on FTNT Financials

• With 2.5 Billion Dollar sales FTNT is not the biggest company BUT with a huge potential.
• Operating Profit /Margin comes along and hits 20%. COGS and SG&A are deducted.
• FTNT sales /Revenue grows annually by around 20%
• Operations are very profitable, > 20%. More Profit is retained from operation
• FTNT is growing Free Cash Flow at 30%. This gives them a huge cushion for investments.
• We see the EPS approaching the $3.00 mark, which looks solid to me since it is a steady climb.
• The Current Ratio indicates that the company can pay for its short term debts. It should be always above 1.
• The Total Debt to Equity Ratio also shows that the company is NOT financed by debt and has room to grow and breath. This Ratio should always be below 1
• We can see a solid spending in Capital Expenditures. 
• The P/E with 50.94 is three times the historical average value of the S&P500 of 16.8 and seems high!. It could be overpriced.

FTNT

FTNT

A solid portion of the company's operation income flows back into the company! About 11-12%

FTNT

All indicators are moving up in a nice not too aggressive way!

FTNT

P/E tells you the capital you have to invest to receive ONE Dollar in Earnings! 

Remember Tesla with $1,600 to make one Dollar, And remember GM with an P/E of about $54? Thus, FTNT is pretty good.

 FTNT

What are the competitors saying?

Palo Alto Networks (PANW)

• With 3.4 Billion in sales Palo Alto is a similar competitor as FTNT.
• Operating Profit /Margin was negative and stays negative, COGS and SG&A deducted.
  
• Sales /Revenue grows annually by around 20% as most of the competitors. I believe this is industry wide and has more to do with the increasing demand as pointed out and NOT with the specific performance of a specific company.
  
• Operations are not so profitable, Comes out of the negative and falls back to zero. Interesting to note that even with a continuous revenue growth of 20% the company generates a negative Net Income and has a negative Operating Income!!
• Enterprise value is increasing enormously in 2020 due to debt increase. We also can see that Stockholders' equity is decreasing accordingly due to debt!
• Current Ratio and Total Debt to Equity Ratio stay within the norm. Those two line should never touch!
• With being almost the same size as FTNT and CHKP but 1/8 of Cisco its EPS growth is negative.
• Free Cash Flow growth has also dropped in 2019 and has a falling tendency since.
• I like the portion of the Free Cash Flow that is reinvested into the company. About 20%.
• The P/E is negative for four years. The company is loosing money. It is not a short term issue.

PANW

We see short term liabilities increased dramatically in 2020!

PANW

We can here see how Revenue growth is declining, still very strong but the Operating Margin and EBITAD cannot make any profit and dwell below ZERO. 

ROE is negative as well due to the fact that Net Income is down and is compared to Shareholders' Equity. 

PANW

Last but not least, P/E and EPS Ratios. Both Ratios telling you PANW is losing money since years!

PANW

Check Point Software Technologies Ltd. CHKP)

• Fantastic Operating Margin and Profitability, over 40%
• Cash Flow Growth is improving and coming out of stagnation
• Revenue Growth is less than 5%. Not huge but consistent. 
• Current Ratio and Total Debt to Equity Ratio are within normal parameters.
• What strikes my eyes though are the EPS of $5.50!! What is this?
  Take a look at the Operating Income and we see that CHKP is only investing about 2% of its operation income in Capital Expenditures. They are saving money. FTNT is spending about 12%, Cisco 5-8%, which has a 10 times bigger budget btw, PANW between 12 to 20%. I think they might cut themselves short in innovative initiatives.
• The P/E Ratio is a little above Market average, which is the S&P500.

CHKP

Here we have very little capital that is going back into the company. That is one reason they have a huge EPS, without digging any further. Only 2% is reinvested back into the company's Capital Expenditures while all comparable competitors invest between 8% as giant CSCO, and 12-20% like FTNT, PANW and CHKP. 

CHKP

We see the EPS way up above competitors. At the same time, see next graph, Revenue is not increasing at all and dwells under 5% growth, CHKP doesnt have the market! They have very little sales compared to competition. Their EPS is artificially held up by not investing into their own company through Capital Expenditure! Are they milking the cow for as long as she gives milk?

CHKP

CHKP

Zscaler, Inc. (ZS)

To forebode the judgement, ZS is more of a joke but apparently a competition to FTNT, PANW and CHKP.

• The Free Cash Flow Growth is all over the place, up a 1,300%, minus 114%$, seems to be a one time sale of huge proportion?
• Operating Margin and Profitability is below -10% and -20%. It seems this business cannot operate in a smooth way.
• In contrast we have a outstanding Revenue growth between 40 and 60%. Why is this when everything else is lagging?
• Another interesting thing is that Current Assets quadrupled last year without that the increasing share price could haul water for it. Also sales increased greatly but not 4 fold!
• It is also a very small player in the field compared with the Revenue of the competition.
• The P/E Ratio is overpriced! You pay $224 for 1$ of profit. This company is overvalued.
  
  

ZS

Current Ratio indicates that the company has 3.5 times more current assets than current liabilities while at the same time current liabilities doubled and current assets tripled!! Where are the current assets coming from? We see a huge debt increase in 2020. The Operating income indicates the company cannot pay its liability with its operations since it is increasingly negative for 4 years.
Enterprise Value is exploding due to the debt they collected in 2020
This company could be a SHORT but not a buy.

ZS

ZS is investing 50-60% of its Free Cash Flow back into the company.

ZS

This company doesn't give me a good feeling at all. Someone must have bought a huge amount of shares and invested in this company. Who is that?

ZS

Cisco, Inc. (CSCO)

• The Behemoth on the field, Its revenue is 25 times that of the competition.
• A solid Operating Margin as well as a Operating Profitability around the 30% mark
• Cash Flow Rate and Revenue Growth are declining. 
• A Revenue growth rate between 5-10% I consider a sustainable growth rate.
• Operating Profitability and Operation Margin should be around 20-30% 
• With an P/E of 37.41 you pay twice the average of the Market for a 1 Dollar Earning
• Stock holders equity is increasing because the company reduced its debt in 2020 and hence Enterprise value, which includes debt, also came down a little. Good news.

CSCO

Revenue Growth is declining a little but not of a concern since it is all over all very strong.

CSCO

Current Ratio and Total Debt to Equity Ratio are further improving. They are above and below their limits where they belong. This company will have room to obtain capital if needed.  

CSCO

With an EPS at around a 1.20$, this company is pretty steady. The share price is not increasing either over two years and also pretty steady and with a relatively low P/E Ratio this company is not specifically a growth company but if you like dividends maybe something to consider. $0.36 Dollar / share every 3 months. On  an annual base it is a 3.2%. More than you get at the bank!

Now that we are here...

What Stock to go with in this field of cyber security?

• Zscaler, Inc. (ZS) I would exclude mainly for their huge debt increase in 2020, unexplained asset growth, and negative Operating Margin.
• Check Point Software Technologies Ltd. CHKP) I would avoid due to their high EPS while having a low Revenue Growth combined with an only 2% reinvestment into the company. I have the feeling they are milking the cow until they can.
• Palo Alto Networks (PANW) I also would reject due to its underperforming Operating Margin, declining Free Cash Flow, and the negative P/E which indicates that the company is loosing money since years. Very Risky.
• Cisco, Inc. (CSCO) has a weak Revenue Growth and declining Free Cash Flow growth. Its P/E is only twice that of the market but they are capital laden and will position themselves well for the new security threads and cloud issues. But I would consider buying it due to its long standing and its Dividends at annual 3.2%. If that is what you like.
• Fortinet (NASDAQ:FTNT) I would give it a buy. It has all over all good numbers. I actually bought it. But I will be out if it turns negative and see next graph WHY.

Last graph and question

How do all those stocks perform against the market? Are they performing better than the market or do they underperform? If they perform as the market we should buy the market, say SPY ETF. No headache. If the stocks underperforming the market we also should buy the market, right? If a stock is greatly underperforming the market we should short it.

Lets see. 

• If any line stays flat it performs as the market, S&P500. S&P500 / FTNT = a constant number as result. So is CHKP. They are performing as the market does.
• If the graph rises to the right like CSCO and PANW then they are underperforming. Why? Because when you divide the S&P by CSCO and you get an ever increasing result it means that the DENOMINATOR, CSCO, is getting smaller compared to the NOMINATOR, S&P500. You "pay" more in CSCO "stocks" or "Dollars" to receive S&P500 "stocks". So the graph rises over time.
• If the graph declines to the right like ZS it is outperforming the market. Why? Because when you divide the S&P by ZS and you get an ever decreasing result it means that the DENOMINATOR, ZS, is getting bigger compared to the NOMINATOR, S&P500. So the graph slopes over time. But ZS I deleted already before.
• Thus, These stocks are not good to outperform the market. Buy the market instead. UNLESS, YOU HAVE A SUPER CATALYST THAT HAS SOMETHING THE COMPETITION DOESNT HAVE, please tell me what it is.