The Market Underestimates Fortinet’s Secular Growth and Share Gains

By Sam Boughedda

Fortinet (NASDAQ:) was upgraded to Overweight from Equal-Weight, while its price target was increased to $69 from $66 per share at Morgan Stanley on Monday.

Analysts there said the firm believes the market “materially underestimates” Fortinet’s secular growth and share gains in an expanding total addressable market (TAM) across security and networking, while recent checks “support a growing backlog and positive revisions” in 2023.

“Security demand remains durable in an uncertain macro as corporates invest to bolster their defenses against rising threats. While investors are concerned with the cyclical nature of the firewall business, we believe this materially underestimates Fortinet’s secular growth drivers (SD-WAN, OT Security), accelerating share gain and opportunity to consolidate >$100 billion in annual market spend across security and networking,” wrote the analysts.

Morgan Stanley stated that with just 5% revenue penetration, it should drive durable 20% or more topline CAGR over the next 5 years.

“Nearer term, with our recent checks indicating durable demand and a large backlog exiting this year, we see meaningful upside to forward consensus estimates,” added the analysts. “Coupled with an acceleration of much higher-margin services revenue and share buyback, we conservatively forecast 30% CAGR in FCF/share from ’22-25e, or more than doubling to >$4 in FCF/share in 2025. At ~20X EV/CY23 FCF, current valuation significantly discounts this forward growth potential and upward revisions.”