Fortinet stock's (NASDAQ: FTNT) year went from bad to worse after the company released its third-quarter earnings report on Nov. 2, as investors decided to overlook the company's terrific growth and guidance and instead decided to sell.
Shares of the cybersecurity specialist fell sharply following its quarterly report. However, a closer look indicates that investors may have overreacted.
Fortinet is growing at a red-hot pace
Fortinet's Q3 revenue shot up 33% year over year to $1.15 billion, driven by impressive growth in both the product and the services segments. Fortinet CEO Ken Xie said on the earnings conference call that the company's revenue grew at a faster pace than the cybersecurity industry, which means it ended the quarter with a bigger share of the market.
Fortinet's margin also increased last quarter. The company's non-GAAP (adjusted) operating margin was up to 28.3% in the third quarter from 25.8% in the prior-year period. The impressive revenue jump and stronger margins led to a 65% increase in Fortinet's adjusted earnings to $0.33 per share. Wall Street was expecting $0.27 per share in earnings on revenue of $1.12 billion.
Fortinet eased past those estimates thanks to the secular growth of the cybersecurity market and its improving share. More importantly, Fortinet's Q4 guidance indicates that its terrific growth is here to stay.
The company is estimating adjusted earnings per share of $0.39 in the current quarter, a non-GAAP operating margin of 30.5%, and revenue of $1.3 billion at the midpoint. Fortinet delivered $964 million in revenue and $0.25 per share in adjusted earnings in the prior-year period (after accounting for the five-for-one stock split that was executed in June this year). So, Fortinet is on track to deliver 34% growth in revenue and a 56% spike in earnings per share in the current quarter.
Investors, however, apparently couldn't look beyond the company's billings guidance. The company has guided for $1.69 billion in billings this quarter at the midpoint of its guidance range, which is a bit below Wall Street's expectation of $1.74 billion. Billings provide a measure of Fortinet's future revenue as the metric includes amounts that are yet to be received by the company.
Fortinet's guidance suggests that its billings are on track to increase 30% over the prior-year period, which is healthy even if it is slightly lower than what analysts are anticipating. What's more, a closer look at some of Fortinet's key metrics will make it clear that the company is headed for better times.
The impressive growth is here to stay
Fortinet's billings guidance may have missed expectations, but investors shouldn't forget that the company is witnessing healthy growth in deal activity. Last quarter, Fortinet struck 153 deals that were worth $1 million or more, up significantly from 83 such deals in the year-ago period. The number of transactions worth $500,000 or more increased to 355 from 232 in the prior-year period.
Not surprisingly, Fortinet's deferred revenue increased 35% year over year to $4.19 billion last quarter, outpacing its actual revenue growth. The faster growth in the company's deferred revenue points toward a robust revenue pipeline as this metric represents the money collected in advance by the company for services that will be provided later.
Moreover, Fortinet believes that it could capture a bigger share of fast-growing cybersecurity niches such as software-defined wide area networks (SD-WAN). Management expects that Fortinet could become the largest player in the secure SD-WAN market in the next two years, which could help the company sustain its terrific momentum as this space is anticipated to clock 21% annual growth through the next decade.
All this shows why analysts expect Fortinet's bottom line to clock a compound annual growth rate of 23% for the next five years. With the stock trading at 60 times trailing earnings right now as compared to its five-year average earnings multiple of 90, investors are getting a relatively good deal on this cybersecurity play. Of course, the stock is still richly valued, but it is growing impressively to justify the valuation.
Also, investors may be able to get their hands on this cybersecurity stock at a cheaper valuation if the sell-off continues.
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