Cloud computing, once a nebulous piece of IT jargon, is now a massive industry worth hundreds of billions of dollars a year and still growing by double digits. Organizations around the globe are adopting the cloud now that it has proven its worth as an efficient way to operate business.
This new computational power doesn't come without some challenges, though, security being one particular pain point cloud providers and adopters need to grapple with. Old cybersecurity methods just don't cut it, as the cloud opens up the ability for mobile workforces to connect with their place of employment's systems and data anywhere -- meaning creating a protective barrier around an office's network doesn't work anymore. Evolving needs have opened the door for cybersecurity start-ups to steal business from older ones. Legacy firms have been grappling with how to adapt, but Fortinet (NASDAQ:FTNT) is doing just fine.
Image source: Getty Images.
First, I'd like to acknowledge that this piece is not meant to weigh in on the best way to secure today's complex IT operations. There is ample debate out there about how best to secure the cloud, whether the security should be cloud-native software (like Zscaler, for example) or if it should go through a firewall appliance that protects a defined network (like in an office building). The answer depends on the business, how it operates, and what its needs are, but the truth is that as employees become increasingly mobile, a mix of both solutions is often the answer.
Just as mixing cloud with traditional work flows complicates things, so does mixing cloud-native cybersecurity with more traditional methods of securing data. But that has been Fortinet's m.o., introducing new virtual tools to its mix of legacy firewall products and creating the Fortinet Security Fabric to help organizations patch together all of the pieces. Rolling out new cloud software paired with its in-house-designed chips powering its appliances (CEO Ken Xie said the latter is still one of Fortinet's strengths over its legacy security peers) has been fueling impressive results. Fourth-quarter 2019 revenue accelerated to a 21% year-over-year rate of growth, and disciplined control over costs led to a 29% increase in adjusted earnings per share. Added to the rest of 2019, it helped boost the full-year report card to an impressive showing.
Metric
12 Months Ending Dec. 31, 2019
12 Months Ending Dec. 31, 2018
Change
Revenue
$2.16 billion
$1.80 billion
20%
Gross profit margin
76.5%
75%
1.5 pp
Operating expenses
$1.31 billion
$1.12 billion
17%
Adjusted earnings per share
$2.47
$1.84
34%
Pp = percentage point. Data source: Fortinet.
What I like about Fortinet's strategy is that it's pulling off its cloud transition with little external help. True, Fortinet did announce a new partnership with cloud connectivity and data center giant Equinix,(NASDAQ:EQIX) the same day as its Q4 report, to help it distribute its new software defined-security network. It has also made a few takeovers like the deals for endpoint security provider enSilo and security automation firm CyberSponse announced at the end of 2019, but both were for undisclosed and likely very small sums of cash.
That means the bottom-line looks great, in contrast with some other companies that are trying to bridge the gap to the cloud. Palo Alto Networks (NYSE:PANW) is in a similar boat but has been in an especially acquisitive mood the last couple of years. It still generates plenty of free cash flow (revenue less operating and capital expenses), but the metric has been falling due to takeovers of smaller cloud upstarts. Fortinet, on the other hand, is homing in on the free-cash-generating abilities of its larger competitor. It's not that I dislike what Palo Alto Networks is doing; it's just impressive that Fortinet is yielding similar revenue upside while shelling out far less.
Data by YCharts.
With 2019 in the books, Fortinet trades for just 29.1 times trailing 12-month free cash flow -- a reasonable value for the growth the company is managing. With cloud computing expected to keep expanding by double-digit percentage rates for the foreseeable future and Fortinet making the transition almost seamlessly, this is one of the best cybersecurity stocks around. It's time to buy again.
See more here:
Fortinet Is Making the Cloud Transition Look Easy - Motley Fool