Fortinet and the 5G Security Market

10/22/2020 5:00 am EST

Focus: TECHNOLOGY

David Fried

Editor, The Buyback Letter

California-based cybersecurity leader Fortinet (FTNT) has distinguished itself by targeting software-defined wide area networks, or SD-WANs, an emerging computer networking technology, asserts David Fried, editor of The Buyback Letter.

With SD-WAN, companies have less need for costly private data networks leased from telecom companies. But with the savings from SD-WAN comes an increased security risk from data going over the public internet.

Fortinet’s leading SD-WAN product was the fastest-growing in the industry during the first quarter. That was due to the company's FortiGate 4400F firewall product, which contains Fortinet's custom-designed NP7 network processor, offering a 13x speed boost over basic CPUs that power rival firewalls.

The pandemic has accelerated cybercrime attacks, with more employees working at home, making companies more vulnerable to various kinds of cybercrime. The cybersecurity market topped $156.5 billion last year across hardware, software, and services, and is expected to grow at a 10% annual rate through 2027.

Cloud stocks have been a bit of a bright spot during the pandemic, as organizations migrate away from old IT operating models. The advent of the cloud and this year’s remote-work boom it supports has ramped up the need for cybersecurity.

Legacy firm Fortinet has developed its next-gen services in-house, while managing to stay in growth and profit mode. It's still growing faster organically than the industry average, which means a growing market share, while maintaining disciplined spending.

FTNT had $1.53 billion in cash and equivalents on hand at the end of June, plus another $100 million in liquid long-term investments and zero debt. Smaller peers seem to be feeling more of an effect from the rapid change and disruption in this industry.

In the most recent quarter (reported Aug. 6), earnings per share and sales grew 41% and 18%, respectively, vs. the year-ago period. Both numbers topped estimates, and the company's guidance also came in above expectations.

Adjusted earnings came in at 82 cents a share, while sales increased to $615.5 million. It was at least the fourth quarter in a row of double-digit growth for both earnings and revenue. The next quarterly results are expected on or around Oct. 31. FTNT has a market cap of about $20 billion.

The other emerging factor that will play into growth for FTNT is the market for fifth-generation mobile networks, which is already huge and expected to grow from $5.5 billion this year to $668 billion in 2026.

The massive growth forecast is because 5G will radically change global communications, by advancing everything from the internet of things (IOT) to self-driving cars. Cloud computing, big data, artificial intelligence, virtual reality and IOT will surge forward in the coming years with 5G networks.

Cybersecurity is a big part of 5G mobile networks. It is crucial to keep the enormous volume of data and information safe, so 5G networks will require built-in, end-to-end security.

The 5G security market will be worth $4 billion in 2023 — and keep growing exponentially from there. The company reduced shares outstanding by 5.356% in the last 12 months.

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