FTNT Stock: How Fortinet Could Help SASE Reach $16bn by 2028

The Fortinet share price performed disappointingly this year — until its Q2 earnings last week. Companies looking to ensure hybrid workforces can work securely with sensitive information might be a long-term tailwind for FTNT stock.

Fortinet [FNET] is a cybersecurity company headquartered in Sunnyvale, California.

The cybersecurity products it offers include vulnerability detection software and firewalls for blocking malicious network traffic. Among its competitors are Cisco [CSCO] and Palo Alto Networks [PANW].

This spotlight discusses Fortinet’s strategic shift to the secure access service edge, or SASE (pronounced “sassy”), market. SASE is a cloud architecture that combines network with security functions and delivers them as a single cloud service.

It will also highlight the challenges FTNT stock could face as the SASE market gets sassier.

FTNT Buys Data Loss Protection Start-Up

Fortinet announced last week it is acquiring Next DLP, a start-up focused on helping businesses ensure their employees are interacting securely with internal data, for an undisclosed amount. The acronym DLP stands for data loss protection.

Next DLP’s main product is the Reveal platform. Among its features are generative artificial intelligence (AI) policy templates. Introduced at the end of 2023, these policies are designed to educate workers about the use of ChatGPT and other large language models, and stop the sharing of sensitive information.

Fortinet Founder, Chairman and CEO Ken Xie said in a press release that integrating Next DLP will “significantly strengthen our data loss prevention capabilities” and its presence in the SASE market.

In June, Fortinet acquired cloud security specialist Lacework for an undisclosed amount.

The Fortinet share price is up 19.1% since the start of 2024 and 19% in the past year through 9 August.

For comparison, CSCO stock is down 10% since 1 January and 14.3% in the year to 9 August, while PANW stock is up 12.4% and 56.7% in the respective periods.

According to Stockcircle, an analysis of the 13F forms filed for Q2 as of 9 August, the only institutional investor to have bought or sold FTNT stock is the quant fund Renaissance Technologies. The firm bought $40.9m worth of Fortinet shares in the three months to the end of June.

Ready to invest in Fortinet? Download the OPTO app today.

How Fortinet, Cisco and Palo Alto Networks Compare in the SASE Market 

FTNT’s stocks performance this year only tells half the story: until the company reported earnings on 6 August, the Fortinet share price was trading at a year low. However, the strength of its Q2 results caused the stock to spike.

Fortinet reported a 10.9% increase in revenue to $1.4bn for the three months to the end of June, driven by a 19.8% rise in its service revenue to $982.4m. Adjusted operating margins jumped 820 basis points to a record 35.1%.

“In the second quarter, we successfully balanced growth and profitability,” Xie said in the earnings release, adding that he expects the company “to emerge as a SASE leader”.

In Q3 ending 27 April, Cisco reported a 3% rise in revenue for its security product category excluding the impact of the Splunk acquisition. On its earnings call for Q3, which ended 30 April, Palo Alto Networks said: “rapid cadence of innovation in SASE has enabled us to maintain SASE [annual reoccurring revenue] growth above 50% for the sixth quarter in a row".

Fortinet is set for steady growth over the next couple of years. Its stock could be better value than both Cisco, which announced another round of layoffs last Friday, and Palo Alto Networks, which is experiencing a temporary slowdown in growth as a result of its platformisation strategy.

FTNT Stock: The Investment Case

The Bull Case for Fortinet

The hybrid working trend is expected to be a long-term tailwind for Fortinet’s SASE products. Being able to work from anywhere securely will be a business priority, according to Gartner.

“By 2027, network and security vendors that are unable to deliver a compelling SASE offering will be mired in niche opportunities,” wrote the research firm in an October 2023 report. Last month, Fortinet was recognised by Gartner’s Magic Quadrant for its role in the SASE market.

Fortinet is also tipped to be one of the long-term SASE market leaders by Dell'Oro Group.

In a report published last week, the firm projected that the market could reach an evaluation of approximately $16bn by 2028.

The Bear Case for Fortinet

While SASE may be a fast-growing segment for Fortinet, it accounts for just 24% of its revenue mix, up from 23% in Q1 2024. Revenue from its secure networking segment, which includes firewalls, has had a 67% share for the past three quarters, down from 70% in Q3 2023.

The cybersecurity industry has been experiencing slower firewall demand since the end of last year. If this trend were to continue, the challenge for Fortinet is to keep growing the SASE share and hope that the trends that have been a tailwind for SASE do not die down.

Conclusion 

Fortinet stands to benefit from more companies investing in securing their digital assets and protecting their businesses from cyberattacks.

The onus will likely be on Fortinet to keep innovating through a combination of organic growth and strategic acquisitions — especially if it wants to stay ahead of rivals in what is becoming an increasingly competitive market.

For more in-depth analysis and guides, including on cybersecurity stocks, subscribe to OPTO Foresight, OPTO’s growth-oriented research platform.