On Wednesday, Citi updated its outlook on Fortinet (NASDAQ:FTNT) shares, increasing the price target to $66 from $65, while sustaining a Neutral rating on the stock. The firm acknowledged Fortinet's better-than-expected performance, which stood out against mixed or negative forecasts.
The cybersecurity company's recent results showcased improvements across various metrics, including product bookings, hardware uptake, and a reduction in the time to register service contracts, suggesting a trend towards stability in the market.
Fortinet's recent profitability metrics were particularly notable, with expectations of a possible relief rally in the stock price. However, Citi anticipates some skepticism regarding the sustainability of the over 30% operating margin.
Concerns were also raised about lighter third-quarter billings and the full-year billings forecast, which implies a reliance on heavier back-end execution.
Additionally, the inclusion of Lacework and Next DLP deals, contributing approximately $40 million in annual run rate, suggests a lower organic growth rate.
Despite these concerns, Fortinet's $1 billion repurchase authorization provides a financial cushion, and its shares are trading at roughly 20 times the enterprise value to free cash flow for the year 2025.
This valuation is close to the narrowest premium observed recently when compared to its slower-growing competitor Check Point Software Technologies (NASDAQ:CHKP).
Citi's slight adjustment to the price target reflects unchanged expectations for near-term and mid-term growth acceleration potential, reinforcing the firm's neutral perspective on Fortinet's stock.
InvestingPro Insights
Fortinet's strategic financial maneuvers and market performance offer a mixed bag for potential investors. According to InvestingPro data, Fortinet boasts a solid market capitalization of $42.64 billion, showcasing its substantial presence in the cybersecurity sector. The company's aggressive share buyback strategy, as highlighted by one of the InvestingPro Tips, underscores management's confidence in the company's value and future prospects. Additionally, Fortinet's impressive gross profit margin of 78.09% for the last twelve months as of Q2 2024 further exemplifies its efficient operations and ability to generate income from its sales.
Yet, this financial strength comes with a caveat. The company's high Price/Earnings (P/E) ratio of 36.24 and adjusted P/E ratio of 32.48 for the same period indicate a premium valuation, which may raise concerns about the stock's growth alignment with its earnings potential. This is further emphasized by an InvestingPro Tip pointing out the high P/E ratio relative to near-term earnings growth. Investors should weigh these factors, alongside Fortinet's robust cash position relative to debt, to assess the sustainability of its stock performance. For those seeking more detailed analysis, InvestingPro offers additional tips to help navigate the complexities of Fortinet's financial landscape.
It's worth noting that analysts predict profitability for Fortinet this year, a sentiment backed by the company's positive track record over the last decade. With such a dynamic financial profile, Fortinet remains an intriguing entity within the tech sector. For further insights and a comprehensive list of tips, interested parties can explore InvestingPro's full suite of resources.
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