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Investment Thesis
With the launch of Deepseek, we believe that an increasing number of enterprises will benefit from lower inference costs—enabled by the use of more affordable general-purpose GPUs or the deployment of PC-grade graphics cards for edge computing within enterprise environments.
As more enterprises set up small-scale computing servers and utilize PC GPUs in-house, the importance of robust cybersecurity measures is becoming increasingly critical. FTNT offers not only software-based cybersecurity solutions but also a range of hardware products, including network firewalls and related security appliances. Although FTNT’s market capitalization is not as large as that of industry giants such as PANW and CRWD, its position as the third-largest player in the sector still offers a certain level of stability and competitive strength.
As the cybersecurity market continues to grow, we believe the broader market will increasingly recognize FTNT’s value.
Company Introduction
Founded: 2000 by Ken and Michael Xie
Headquarters: Sunnyvale, California
Employees: Approximately 14,138 (as of 2024)
Market Capitalization: Approximately $75 billion
Stock Exchange: NASDAQ (Ticker: FTNT)
Fortinet is a multinational cybersecurity company and a provider of high-performance and integrated security solutions. FortiGate, the firm's flagship product, is an NGFW and the basis of its Security Fabric platform. The platform delivers one, unified method of threat detection and response for all network environments, including on-premises, cloud, and hybrid networks.
Key Products and Services:
FortiGate NGFW: Delivers high-performance and advanced threat protection for enterprise networks.
FortiGuard Labs: Real-time threat intelligence to enhance the efficacy of Fortinet's security solutions.
FortiAnalyzer and FortiManager: Centralized logging, analytics, and management for streamlined operations.
FortiEDR and FortiXDR: Endpoint detection and response to provide protection to individual devices.
FortiSOAR: Security orchestration, automation, and response to accelerate incident response times.
In 2024, Fortinet reported total revenues of $5.96 billion, marking a 12.3% year-over-year increase.
Revenue Composition:
Service Revenue: $4.05 billion, accounting for approximately 68% of total revenue. This segment experienced a 19.8% growth compared to the previous year.
Product Revenue: $1.91 billion, representing about 32% of total revenue. This segment saw a slight decrease of 1.0% year-over-year.
Key Highlights:
Security Subscription Services: This sub-segment of services generated $2.32 billion, the highest-grossing revenue stream for Fortinet in 2024.
Unified SASE (Secure Access Service Edge): Annual Recurring Revenue (ARR) was $1.12 billion, a year-over-year increase of 27.9%.
Security Operations: ARR was $422.4 million for this segment, a year-over-year increase of 32.2%.
The robust growth in service revenue, particularly in subscription-based offerings like Unified SASE and Security Operations, underscores Fortinet's shift to recurring revenue streams, providing increased stability and predictability in financial performance.
Industry Introduction
Cybersecurity Industry Outlook: Network Security Focus
Fortinet's business is primarily in the network security sub-industry of the broader cybersecurity industry. This sub-industry encompasses solutions that are designed to protect the integrity, confidentiality, and availability of data and resources as they travel across or are accessed via network infrastructures.
Market Size and Growth:
The global network security market was approximately $24.55 billion in 2024.
It is anticipated to grow to $28.58 billion in 2025 and $72.97 billion in 2032, with a compound annual growth rate (CAGR) of 14.3% during the forecast period.
Key Drivers:
Increasing Cyber Threats: Increasing evasive cyberattacks like ransomware and advanced persistent threats (APTs) have fueled the need for robust network security solutions.
Digital Transformation: The sheer use of cloud computing, IoT devices, and remote work has grown the attack surface, and thus, the demand for high-level security.
Regulatory Compliance: Strong data protection regulations everywhere in the world compel organizations to invest in end-to-end network security to continue being compliant.
Fortinet's Strategic Positioning:
Fortinet's Security Fabric architecture combines several security elements, providing integrated and automated defense of the full digital attack surface. This follows the industry direction toward unified security platforms that provide centralized visibility and control.
Additionally, Fortinet's commitment to machine learning and artificial intelligence complements its threat detection and response, positioning it well in an industry that increasingly values proactive and intelligent security solutions.
In brief, Fortinet's extensive line of integrated security products and its strategic focus on innovation position it as a solid player in the rapidly expanding network security segment of the cybersecurity market.
Financial Analysis
Strong Revenue Growth and Three-Year High Cash from Operations:
Fortinet closed Q4 2024 with impressive financial performance, marked by strong revenue growth, record profitability, and robust cash generation. Total revenue reached $1.66B, up 17.3% year-over-year, reflecting balanced strength across both product and service lines. This growth was accompanied by a 39.2% operating margin, the highest in three years, showcasing exceptional cost discipline and operational efficiency. Gross margin also expanded significantly to 82.1%, indicating a favorable shift toward higher-margin services. Additionally, Fortinet delivered its highest cash from operations in three years, underscoring the quality and sustainability of its earnings. These results highlight the company’s successful pivot toward a more recurring, service-oriented business model while maintaining strong profitability and cash flow.
Rule of 45:
FTNT defines the Rule of 45 as the sum of its YoY revenue growth and operating margin. This metric is an evolution of the commonly used "Rule of 40" in the SaaS industry, which combines revenue growth and profitability to assess a company's financial health. Fortinet's adoption of the Rule of 45 reflects its ambition to achieve higher performance benchmarks. FTNT has met or exceeded the Rule of 45 in five of the last seven years and expects to continue in 2025.
Unified SASE and Security Operations RPO, ARR, and Billings Growth:
Fortinet’s strong performance in key growth metrics highlights its accelerating shift toward a recurring, cloud-based security model. Remaining Performance Obligations (RPO),the value of contracted revenue not yet recognized, rose 21% for Unified SASE and 19% for Security Operations, signaling strong long-term demand. Annual Recurring Revenue (ARR), which reflects the annualized value of active subscriptions, surged 28% and 32% respectively, pointing to rapid expansion of Fortinet’s cloud-delivered offerings. Meanwhile, Billings, a leading indicator of near-term revenue capturing total invoiced sales, grew 13% for SASE and 12% for SecOps. These gains demonstrate that Fortinet is successfully scaling its subscription business in response to rising enterprise demand for modern, hybrid security architectures, strengthening its position in high-growth markets like SASE and Security Operations.
Valuation
We are valuing Fortinet using two approaches: trading comparables and exit multiple analysis. Fortinet is trading at a premium to certain peers such as CrowdStrike, Palo Alto Networks, and Zscaler, with 2025E EV/EBITDA of 31.6x vs. a peer median of 25.0x. Its EV/Sales and P/E multiples also trade above peer medians, supported by robust margins, scale, and consistent execution in cybersecurity.
Our exit multiple analysis applies Fortinet's historical median forward multiples—8.5x EV/Sales, 29.0x EV/EBITDA, and 41.0x P/E—on 2026 projections. This suggests an average share price of $101.70, with a valuation range of $44.10 to $159.20. These results provide a conservative but realistic anchor for long-term valuation based on Fortinet's trading history.
Averaging the two methods, we have a blended 12-month target price of $122.42, a 25.3% upside from the current share price. Based on our rating system, we reiterate Fortinet as a Strong Buy.
