Episode 33 | Fortinet and the Cybersecurity Tailwind

Rodney Lake (0:01)

Thank you for joining Market News with Rodney Lake. This is a regular program for the GW Investment Institute, where we talk about timely market topics. I'm Rodney Lake, the Director of the GW Investment Institute. Let's get started. Welcome back to Market News with Rodney Lake. I'm your host, Rodney Lake. Today's episode is on the company Fortinet. Again, this is a GW Investment Institute program. This is entertainment purposes only. We are coming to you from the GW School of Business in Foggy Bottom in Duquesne Hall. Welcome back if you've been a viewer and if you're watching on YouTube, thanks very much. And if you're listening on Apple, Spotify, Amazon, welcome back and welcome if it's your first time. All right, let's jump into it. So if you've been following this, the Investment Institute investment framework is what we use to evaluate these companies. Fortinet is a larger holding in one of our portfolios for the Investment Institute. So we're gonna talk about it today. And it's been doing well lately. Now, it's had some volatility over the past couple years, but right now, we're in mid February, it's hitting a 52-week high. So let's jump into the business. So this is the company Fortinet, and the ticker is FTNT. So what is Fortinet? So let's talk a little bit about what is actually the business. What do they actually do? So if you talk about Fortinet, the company, if you know it at all, you're probably thinking, okay, this is a cybersecurity company. So they do network solutions, network cybersecurity, security software. And so they offer this through subscription services as well. So let's jump in to talk about the breakdown here of where the revenue, really it's services is a little over half, is most of that, and let's say two thirds, the three quarters of the revenue, and then product is about a quarter of that revenue. So when we jump into where does that come from, we're in the world, about 40% of the Americas, about 40% is Europe, Middle East and Africa, and 10% in Asia. So now let's talk about what's the revenue look like for this business. All right, so what's the revenue? Cash and cash, oh, sorry, excuse me. Revenue, $5.9 billion and that's grown 12%. We'll get to the balance sheet here in a second. And let's talk about the market cap for the company just to get our bearings here.

Again, we're at 52 week high, $87 billion market cap. So this is not a small company. This is quite a large company and has grown pretty dramatically over the last five years, which the Institute has been a beneficiary of that growth. So thank you people who are running Fortinet and we'll talk about the management team as well. And so again, $5 billion in revenue, you're talking 12% growth over the last year. But when you look back in 2021, you talked almost 30% growth, 22, 30% growth, 23, 20% growth, 24, 12% growth. And we're projecting another 12% growth approximately for next year and then out, you're talking almost a little more than 12, closing in on 13% growth. So this company has done well, is doing well, hitting a 52 week high, and you talk about what's the business. And so most of it is services. So you can think, okay, well, probably the margins should be higher, right? Well, your guess would be correct. When you look at the gross margins for this business, they are 80%. So these are some of the best margins you're going to get. When you look back at companies or think back to the companies that if you've been watching the show, this is the category of Visa and Nvidia. These are super high gross margins, right? When you're talking 80% gross margins, this is in a subclass of its own. You don't have a ton of companies that are going to have 80% gross margins. And then you get down to the net margins, not quite as outstanding, not as good as Visa, for example, but still very good net margins of 26%. So very healthy net margins, and they're projected to grow. The gross margins are projected to stay around the same. The net margins are projected to grow a little bit. And so very good gross margins, very healthy net margins at 26%. So this is, when you think about this business, so let's step back for a moment and think, is cybersecurity, is network security important? I think it would be hard to find someone to say it's not important. And it would also likely be hard to find someone to say it's not likely to be more important moving forward, right? As everything is more and more digitized, as everything continues to be more online, more sort of digitally based, you're going to need security, right? And so companies broadly that operate in this category have a tailwind, very likely, if you're thinking very broadly about, okay, this business, this market, this industry, this cybersecurity and security business for software and digital is going to likely grow. And now we don't know. It doesn't mean that Fortinet specifically will benefit. They have to execute. But they certainly have a tailwind. This is not a headwind business. This does not seem like a business or industry that is shrinking. It seems like a business that is growing. And the demand for products and services that people find value and make and work is likely to grow. And you're going to be willing to pay for that security if it works. And so again, they have to execute, but the tailwind in their industry is quite strong. And if you look at people are paying up for this, it's not a negotiable. Certainly, if you know any business of any size, you need cybersecurity, you got to make this work. And so people, it's a non-negotiable, depending on who you're going to go with. There are other players in the market, and we own some of those too. But we're talking about Fortinet, and they have done well. And again, those 80% gross margins are outstanding, and net margins of 26, very healthy. So overall, when you talk about the business, you're giving this high marks, right? The business is growing, and you look at the revenue growth here, you're talking 30% nearly over the last, 28, 30, 20, now 12 And so that has slowed down, but it's become a much bigger company. Now, you're 6 billion in revenue, projected to go to 6.7 billion for 2025, and then 2026, 7.6, growing another 12%. So good growth, not as much as they've had in the recent past, but good growth in the business and a good tailwind in the industry, very high gross margins, 80%, good healthy net margins at 26%. So the business overall, you're thinking, okay, this is probably in the realm of an eight or a nine type of business. When we're scoring one to 10, 10 being the best because, again, the tailwind, the gross margins and the net margins, very good. So we'll come back to the business when we start talking about everything a little bit and when we'll weave a few things in. But overall, this is a fantastic business and has been doing quite well.