Fortinet Earnings: Platform Vendors Nets Another Strong Quarter as Demand Remains Robust

We maintain our $68 fair value estimate for wide-moat Fortinet FTNT after the firm reported a strong start to fiscal 2023 with sales and margins exceeding our expectations. Near-term macro headwinds remain, with broad-based budget scrutiny and spending optimization. However, we believe entrenched cybersecurity vendors such as Fortinet are better prepared to weather the macro pressures as their solutions are often must-haves for their clients. We believe that Fortinet, as a platform vendor, also stands to benefit from increased consolidation as customers rein in sprawling IT toolkits and reduce their overall number of IT vendors. We believe the breadth of Fortinet’s solutions, coupled with secular tailwinds such as increased spend on cybersecurity and consolidation of vendors, will allow the firm to deliver shareholder value in the long run. While we are optimistic on Fortinet’s value proposition over the long term, we believe the company’s current valuation reflects this optimism and view Fortinet’s shares as trading in the 3-star range.

Fortinet’s top line clocked in at $1.26 billion, up 32% year over year and ahead of our estimate of $1.175 billion. As in recent quarters, product revenue spearheaded the outperformance with product sales growing 35% year over year to $501 million. The firm’s billings, a forward-looking metric, also remained strong, growing 30% year over year to $1.50 billion.

Fortinet’s enterprise penetration also remained potent with the number of $1 million-plus deals growing 38% year over year to 124 for the first quarter. We see increased upmarket penetration as a good sign for Fortinet as enterprise customers tend to be stickier than their SMB counterparts. Further, because enterprise customers also have a diverse set of security needs, this upmarket movement can allow Fortinet to sell its customers a host of security solutions, thereby entrenching itself into its clients’ ecosystems.