Fortinet

Fortinet closed out its second quarter with sales growing 26% to $2 billion and its adjusted operating margin expanding 5 points to 38%. The firm's nascent secure access service edge, or SASE, and SecOps offerings contributed 34% of total billings.

Why it matters: We continue to remain optimistic on Fortinet's strategy to diversify beyond network firewalls into growing security areas, including SASE, SecOps, and operational technology, or OT, security. We also see artificial intelligence-driven demand continuing to bolster Fortinet's top-line growth. SASE and SecOps billings grew 35% and 25%, respectively. We see this growth as healthy, and our long-term growth thesis for Fortinet is contingent on the firm's ability to execute in these two key verticals as the business diversifies beyond network firewalls. At the same time, however, firewalls are showing strong growth, with secure network billings growing 34%. We attribute this growth to both new AI data center demand and the firm's hardware refresh cycle, with AI demand being the bigger driver.

The bottom line: We raise our fair value estimate for wide-moat Fortinet to $143 from $108, with the firm's results and outlook well ahead of our prior estimates. We are seeing real AI demand for Fortinet's security products and are revising our near- to medium-term growth estimates higher. Despite our material fair value hike, we believe much of the upside is baked into the stock price, with shares trading in the 3-star range.

Bulls say: In our bull case, we explore the scenario in which AI-driven product growth inflects higher, with a five-year growth rate of over 20%. In this scenario, our fair value for Fortinet is north of $200, implying upside from current levels.

Key stats: While still a relatively small part of the business, OT security's billings grew 56%. We see strong tailwinds for this segment as countries around the world seek to secure critical infrastructure.

Our fair value estimate for Fortinet is $143 per share, implying a 2026 enterprise value/sales multiple of 12 times.

We forecast Fortinet’s revenue growing at a 16% compound annual growth rate over the next five years. With customers seeking to consolidate their security spending on platform vendors, we see an opportunity for Fortinet to leverage this customer buying behavior into increased sales for its SASE and SecOps businesses. Additionally, we think Fortinet’s land-and-expand model will continue to bear fruit. The firm has shown great success in upselling its existing customers by either offering additional modules within a platform or additional platforms. In the future, we project continued upselling/cross-selling activity for the firm.

Fortinet’s gross margins have hovered in the mid-70s over the last few years. However, as the company grows and software becomes a larger part of its top line, we expect gross margin expansion. We see this phenomenon across our coverage as software firms can distribute their costs over an increasing revenue base, driving the cost of sales down as a fraction of sales. As a result, we are modeling GAAP gross margins to expand to the low-80s over our 5-year explicit forecast.

Fortinet has spent heavily on research and sales in the past. However, as it scales, we expect these line items to marginally decrease as a percentage of sales. We forecast operating margins will approach mid-40s by 2031, up from 31% in 2025.

We assign Fortinet a wide moat rating owing primarily to strong customer switching costs, and second due to a network effect associated with its offerings. We believe that Fortinet’s platform approach to cybersecurity, by combining key aspects of a business’ security needs under one umbrella, has also enabled the firm to grow its wallet share among existing clients while adding new ones. As a result, we forecast the firm to generate excess returns on invested capital over the next two decades.

As we look at the broader cybersecurity segment, we believe the complexity and intensity of threats are ever-increasing. Enterprises continue to adopt software-as-a-service solutions, undergo digital transformations, and migrate to the cloud, all while employees work remotely. In turn, we see the number of attack vectors (or entry points for nefarious players) growing rapidly. Similarly, the intensity of digital threats is also on the rise, with higher costs of a data breach, including punitive fines for any customer data theft.

In response, IT departments have been adopting more cybersecurity tools, although a consequence has been the creation of silos in which disparate solutions do not work together effectively. Based on various industry reports, we estimate that enterprises currently use 60-80 different security solutions but wish to narrow that number down to 15-20 key solutions. Amid this changing landscape, we see an opportunity for platform-based cybersecurity vendors such as Fortinet to help enterprises consolidate their digital footprints while maintaining a secure ecosystem.

We view Fortinet as a leader in the convergence of networking and security, in part due to the firm’s strength in network firewalls and software-defined wide-area networking. Fortinet has also begun strengthening its network security platform with an extension including cloud security, security operations, and zero-trust access. Fortinet’s solutions can be broken down into products and services. The firm’s products include its network firewalls along with the security fabric platform consisting of network, endpoint, and cloud security, among other modules. Fortinet’s services revenue primarily consists of FortiGuard, a threat detection and prevention solution, and FortiCare, a support service for Fortinet’s products. Put together, the firm’s products and solutions enable Fortinet to protect key IT infrastructure within an enterprise and also enable the smooth and secure functioning of its clients’ cybersecurity ecosystems.

Across our coverage, we see high switching costs for enterprise-focused cybersecurity vendors, such as Fortinet, that often have an expansive footprint across an enterprise. To uproot such a vendor requires not only a competitive offering from another vendor, but often retraining staff to use the new platform, a period of increased vulnerability. Additionally, we believe security-related IT decisions are driven by security analysts and engineers that focus on performance rather than price, so enterprises are unlikely to rip out cybersecurity solutions as a source of potential cost-savings. Further, by remaining neutral to form factor and deployment, Fortinet is able to land customers with varying network security needs. We have seen the company move upmarket by targeting larger customers that tend to be stickier and have a higher lifetime value.

Along with high switching costs, we believe a network effect reinforces Fortinet’s economic moat. Cybersecurity, in its essence, is a data problem, and attacks are now too overwhelming to be handled manually. In turn, vendors have developed AI solutions to automate processes and pick up threats (especially zero-day attacks that have never been seen before). However, artificial intelligence and ML solutions are only as good as the data that is fed to them. This need for good-quality data is where we see entrenched platform vendors, such as Fortinet, having an edge as they have data streaming in their security solutions from across the enterprise.

By collecting and analyzing this rich data coming into its platforms, a platform vendor such as Fortinet can uncover threats and new threat signatures that can then be used to update its entire client base’s security situation. As more data comes in, Fortinet’s platforms become better at detecting and mitigating cyberthreats. As a result, more customers join Fortinet’s platforms due to superior products—which, in turn, leads to more data, and the flywheel spins faster. We see this network effect as reinforcing switching costs as well—with customers hesitant to leave Fortinet as it may entail losing the latest threat updates essential to maintaining secure IT infrastructure.

Fortinet has strong secular tailwinds as endpoint security, cloud security, and the convergence of networking and security are projected to grow rapidly.

Fortinet’s strength in the high-margin firewall segment should allow the firm to generate substantial cash in future.

The company stands to benefit as clients consolidate vendors and opt for a platform-based cybersecurity approach.

Large public cloud vendors often offer their own cybersecurity solutions, which could hamper Fortinet’s growth opportunities.

Fortinet’s competitors also utilize a platform approach, thereby entrenching them in their clients’ ecosystems and making them harder to displace.

There is always a risk that Fortinet may miss out on the next big technology, thereby allowing its competitors to catch up.