While FireEye's (FEYE) earnings-induced decline last week threw cybersecurity plays across the spectrum into a downturn, Fortinet (FTNT) was able to continue its upward trajectory.
Fortinet -- a Sunnyvale, Calif.-based cybersecurity company that is a key holding of the Growth Seeker portfolio co-managed by Tematica Research CIO Chris Versace and Meritas Advisors founding partner Lenore Hawkins -- has been able to rise 40% since its February low, seemingly outlasting the growth stock selloff that took place between August and February.
The stock's advance has been helped by the strong earnings results and guidance the company provided on April 26. Over the last four weeks, Fortinet has gained more than 13%. The need for business level cybersecurity is apparent as cyber-attacks become more prevalent and businesses scramble to catch up and get ahead of imminent threats.
"A Goldsmith survey of 1,530 non-executive directors and C-level executives in the U.S., U.K., Germany, Japan and Nordic countries found that more that 90% of corporate executives do not think they can read a cybersecurity report and are not prepared to handle a major attack," Hawkins -- who also co-authored the book Cocktail Investing with Versace -- said in an email exchange today. "This despite companies losing around $445 billion to cybercrime in 2015, according to an estimate by the Center for Strategic and International Studies."
So the market is ripe for the type of services Fortinet provides, but in a crowded cybersecurity field, you have to look under the hood on Fortinet to determine whether it has the right engine to go the distance.
In 2015, the company generated an operating margin of 2.4%, in line with its peer group, but a net margin of 0.08%, well above the peer average of -6.8%. Cash flow as a percentage of sales was 28%, also above the peer average of 23.7%. Fortinet's return on capital was 2.1%, below the peer average of 4.4%.
Fortinet CFO Andrew Del Matto was a guest on Jim Cramer's Mad Money program Tuesday night. Del Matto touted Amazon (AMZN) and Microsoft (MSFT) as the company's cloud play partners and pointed out that Fortinet has tripled its rate of growth since 2013. Fortinet has 270,000 customers after adding 9,000 in the previous quarter, and it counts the majority of Fortune 100 companies among its customers.
On the downside, the company has had a slew of high-level executive departures, with Vice President of Marketing Luanne Tierney leaving last June to be Senior Vice President of Marketing at competitor Proofpoint (PFPT). That gives Hawkins some trepidation. "Seeing multiple high level executives leave the company makes us wonder if there is a problem with either the corporate culture, or if those executives are concerned with the potential for success in the long run," Hawkins said.
However, the company had enviable levels of success as it increased first-quarter billings by 30%, while gross margins widened to 74% from 71%, and operating income advanced 50%. Revenue for the period rose 34% year over year.
"Fortinet has consistently beaten revenue expectations for the past six quarters and has matched or beaten earnings expectations in six out of the last six as well. This tells us that management has reliable visibility and does a great job of managing expectations," Hawkins concluded.