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3 Reasons Fortinet Is a Top Cybersecurity Stock For 2021

In the realm of cybersecurity, 2020 was all about cloud-based cybersecurity software names. Organizations were forced to migrate to cloud computing-based operations like never before, so there was huge demand for services from companies like CrowdStrike Holdings (NASDAQ: CRWD), Zscaler (NASDAQ: ZS), and Okta (NASDAQ: OKTA) -- and prices for all three stocks increased by triple digit-percentages last year as a result.

But overlooked among companies in this sector was Fortinet (NASDAQ: FTNT), one of the largest cybersecurity firm pure-plays out there (as measured by revenue). Fortinet is still outpacing average industry growth by a wide margin. In fact, I think this could be one of the best security stocks to buy for 2021.

Here are three reasons why.

Someone pictured off screen working on a computer. An illustrated padlock is displayed in the foreground, illustrating cybersecurity.

Image source: Getty Images.

1. Fortinet offers more than just a migration to the cloud

Fortinet didn't have a shabby 2020 either. Its stock price rose 39% on the year and is up another 7% through the first month of 2021. Like many of its cybersecurity peers, it enjoyed plenty of new demand for its security platform -- including a 21% year-over-year increase during fourth quarter 2020 -- as its customers grappled with new operational challenges arising from the pandemic.

Metric

2020

2019

Change

Revenue

$2.59 billion

$2.16 billion

20%

Gross profit margin

78%

76.6%

1.4 pp

Adjusted earnings per share

$3.35

$2.50

34%

Free cash flow

$908 million

$716 million

27%

Pp = percentage point. Data source: Fortinet.

Of the total for full-year 2020, nearly two-thirds of revenue was "services," software and related cloud security in Fortinet's toolkit for big businesses. Service sales increased 22% from 2019. "Product" made up the other one-third of revenue.

Though devices like firewalls (which monitor and manage the flow of data and access into and out of a physical location, historically an office building) are billed as "legacy" cybersecurity of yesteryear, sales at this segment at Fortinet notched a 16% year-over-year increase.

Calling this a "legacy" cybersecurity firm is a little disingenuous. It's only a legacy security outfit in that it predates many of the fastest growing cloud security software names (like the ones mentioned earlier). That's because Fortinet sells best-in-class security chips for servers and hyperscale data centers -- you know, the infrastructure that enables cloud computing services in the first place. The cloud is more important than ever, and as more organizations build and migrate their operations over to these data centers, Fortinet is getting a share of their construction. It appears that a new data center upgrade cycle is on the way because of this rapid move to the cloud, so I think Fortinet is a top buy because of this "product" component of its business.

2. Fortinet is outpacing the industry average

Also important, though Fortinet is not the newest kid on the block with the hippest cloud-native platform, it is nevertheless still outpacing the overall cybersecurity industry's growth. Analysts at tech researcher Gartner calculate global spend on security increased by just a low single-digit percentage last year -- including a double-digit percentage decrease in spending on network security equipment. Fortinet's services and products segments are thus beating out many of its competitors, implying it's not only growing, but also gobbling up market share.

For 2021, various forecasts expect a rebound in global security spend, somewhere in the ballpark of 10% higher than 2020 as initial effects of the pandemic are lapped. Fortinet expects to once again grow at a faster pace. At the bottom end of its first quarter 2021 estimate, it expects revenue to increase 16% year over year. For full-year 2021, management called for a 17% year-over-year increase over 2020 and thinks it will exceed $3 billion in annual sales for the first time -- not bad for a "legacy" security outfit.

3. Fortinet is highly profitable and flush with cash

Fortinet is also a highly profitable firm. Free cash flow increased at an even faster rate than sales last year, up 27% to $908 million, and good for a free cash flow profit margin of 35%. Cloud-native security firms may be all the rage and tout being the future of the industry, but Fortinet's steady growth and profitability would indicate it is more than holding its own in this new digital era.

The company has used its enviable profit margins to foster organic growth (peppered with a couple of very small acquisitions) over the last couple of years, and is gracefully making its own transition to a cloud-first world. A steady stream of free cash flow and a squeaky clean balance sheet mean this firm is well positioned to continue its advance. At the end of 2020, Fortinet had $1.84 billion in cash and short-term investments and zero debt.

Investor takeaway

I find it odd to be calling a company like Fortinet a "value" stock, but it is when comparing it to its younger high-flying peers. Most investors are completely missing what Fortinet does, its strong position within the security industry, and enduring (and highly profitable) growth story. And while 30 times trailing 12-month free cash flow isn't cheap, it certainly is a compelling deal when comparing it to other names in this important corner of the technology sector. Given the price tag and the company's outlook for the year ahead, I'm still buying.

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Nicholas Rossolillo owns shares of CrowdStrike Holdings, Inc. and Fortinet. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends CrowdStrike Holdings, Inc., Okta, and Zscaler. The Motley Fool recommends Fortinet and Gartner. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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