Fortinet Q2 FY12/24 Earnings Review
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The Clock Is Ticking
by Alex King, CEO, Cestrian Capital Research, Inc.
Fortinet ($FTNT), together with Palo Alto Networks ($PANW), is to be congratulated for continuing to post numbers that look all the world like software company numbers. High gross margins, strong cashflow margins, big order book, all that. The challenge is that in truth, it's a hardware company that sells secure network boxes to its customers and then charges them to run security services across those boxes. This is a wonderful gig whilst it lasts, and it has lasted - like all legacy tech - longer than it has any right to, because customers don't much like torching their cybersecurity installations and hoping the new one works properly on time. (Because usually it doesn't, and whilst you can risk that in some apps, why risk it in cyber?).
One day, FTNT and PANW will in my view commence the long walk to retirement, which will be marked by flatlining revenue and >40% cashflow margins as lazy customers get royally milked for moves, adds, changes, renewals, underlicensing, consulting, anything that the future FTNT and PANW CEOs can think of charging for - this is how you play to win the videogame called Legacy Tech.
That day is not today. But personally I prefer to own security stocks issued by pureplay software & services providers - for me Zscaler ($ZS) and Cloudflare ($NET) are my chosen names in cyber. In-network software and no reliance on proprietary hardware. This is how all tech sectors go in the end. For this reason we rate FTNT at 'Do Nothing'. Because I think that in the end, you are fighting the tide with this one. Like any stock it can be traded successfully short-term, but would I personally want to own it for the next 10-20 years? I would not.
Below - available to paying subscribers of all tiers here - we review the fundamentals, the valuation, the stock chart, our rating and price target. Read on folks.