Don't look now, but Wall Street's enchantment with Fortinet (FTNT) appears to be back in full swing after the relationship hit some turbulence in July.
Fortinet, which makes network security hardware, went public in November 2009. It treaded water for a while, and then the stock staged a classic breakout from a first-stage base in August 2010. It soared 160% over the next 10 months as fund managers piled into the stock, embracing its growth story.
I had no idea what was in store for Fortinet when it reported second-quarter earnings in July. The stock cratered 19% on July 20 in huge volume. It was strange price action because the company delivered another quarter of strong bottom-line and top-line growth. Apparently, there were concerns about slowing sales in Europe, Middle East and Africa (EMEA). Second-quarter profit jumped 80% from a year ago to $0.09 a share while sales growth accelerated again, rising 35% to $103 million. Investors sold the stock anyway with a vengeance.
I have a history with Fortinet. I put out a buy recommendation for my model portfolio in mid-May when the stock was trading around $23. On July 7, the stock hit an intraday high of $28.56. At the time, I had no intentions of locking in a quick profit. I felt like I owned a stock that had the potential to be a leader in its industry and possibly even a takeover target down the line. I normally don't like to argue with the market, so I decided to cut ties with Fortinet around $20.50 for a manageable loss, and the stock went on to lose another 20% over the next two months.
But buyers have come back into Fortinet in spades in recent weeks. There was buying ahead of its earnings report on Oct. 24 and the stock continues to be accumulated.
Shares gapped up 12% on Oct. 25 at the company reported a 44% rise in third-quarter profit. Sales growth accelerated yet again, rising 37% to $116.4 million fueled by continued strong demand for the company's computer-security products like firewall and anti-virus devices.
Product revenue rose 48% year-over-year to $53.1 million while services revenue increased 30% to $57.8 million.
EMEA sales rose 31% from a year ago to $37.9 million, a nice acceleration from 21% year-over-year growth in the second quarter. The EMEA region included a large deal with a European mobile carrier where Fortinet replaced the current firewall provider and also beat out Juniper Networks (JNPR), Cisco Systems (CSCO) and Check Point Software Technologies (CHKP).
It was a bullish conference call. CFO Ken Goldman said: "We are benefiting from market trends in MSSP [managed security service provider] and the SaaS [software as a service] delivery security, virtualization and network security mobility as well as increases in network performance and bandwidth intensive applications that require high performance security."
Goldman called the third quarter "the best quarter ever in the enterprise segment." He also cited strong performance in emerging markets like Latin America and Southeast Asia. In the Asia-Pacific region, sales rose 38% from a year ago to $28.5 million, fueled by growth in the mid-range and high-end product segments.
The bottom line is that Fortinet needed a strong quarter, and it delivered big-time.
Short interest isn't that high in Fortinet, so I doubt the pre-earnings rally was short-covering. Instead, I think it's a good bet that new institutional money has been coming into the stock. And I think there's a good chance it will continue as Fortinet continues to grab market share.
On the chart, Fortinet looks like it's on the verge of coming out of big base that started after the stock sold off in July. It's been working its way higher in strong volume, pre-earnings and post-earnings. Despite a big price move off its September lows, I still don't think it's too late. One could wait for a low-volume pullback, but then again, the stock looks like it's poised to break out over its recent high of $25.33.