The stock market sell-off has been brutal on technology companies this year, as rich valuations, surging inflation, rising interest rates, and fears of a recession have combined to dent investors' confidence in the prospects of fast-growing companies.
Fortinet (FTNT 0.28%) is one such company that has suffered thanks to the market sell-off. Shares of the cybersecurity specialist are down 21% so far this year despite the impressive growth in its revenue and earnings, a far cry from the outstanding returns it delivered in 2021. However, Fortinet management executed a 5-for-1 stock split on June 22, a move that makes this high-growth company accessible to a bigger pool of investors.
Of course, Fortinet stock's valuation and market cap remain the same. It's just that Fortinet shareholders will now have five shares for every share they held before the split. But the move could attract more retail investors toward the stock -- the split has reduced the price of each Fortinet share to less than $60 -- which wouldn't be surprising given its bright prospects. Let's look at the reasons why this beaten-down stock-split play is worth buying following its slide in 2022.
Fortinet is growing fast
Fortinet released its first-quarter 2022 results on May 4, reporting a 34% year-over-year increase in revenue to $955 million. More importantly, the company's bookings shot up 50% year over year to $1.28 billion during the quarter. This points toward better times for Fortinet, as bookings are the total value of all orders received by the company during the quarter.
Not surprisingly, Fortinet exited the quarter with deferred revenue of $3.66 billion, a 33% increase over the year-ago period. Deferred revenue is the money collected in advance by a company for services that will be rendered later. It is recognized as revenue on the income statement once the services are delivered. So Fortinet's healthy deferred revenue growth indicates that its momentum is here to stay.
It is also worth noting that Fortinet's customers are increasing their spending on the company's offerings. For instance, Fortinet signed 90 deals that were worth $1 million or more last quarter, up from 66 in the prior-year period. The number of deals worth more than $500,000 increased 45% year over year to 243.
More importantly, Fortinet's guidance suggests that it is on track to register healthy growth this year. The company expects $4.38 billion in revenue in 2022, which would be a 31% increase over last year. Analysts are upbeat about next year as well, forecasting 21% top-line growth. Even better, Fortinet's earnings are expected to increase at a rate of nearly 21% a year for the next five years.
These upbeat forecasts aren't surprising given the potential growth of the market that Fortinet operates in and the company's solid share.
The impressive growth is sustainable
Fortinet sees lucrative opportunities in the cybersecurity and enterprise networking markets.
Enterprise networking, for instance, represents an $80 billion opportunity for Fortinet, while it sees the cybersecurity market presenting another $100 billion in addressable revenue by 2025. Fortinet is in a solid position to convert this massive end-market opportunity into actual revenue.
For example, Fortinet's core market of network security is expected to generate $27 billion in revenue by 2027 compared to $21 billion this year. The company has set itself up nicely to corner this market, with a solid customer base that includes 80% of the Fortune 500 companies. As a result, Fortinet's share of the firewall market now stands at 38%, which is well ahead of its cybersecurity rivals.
Meanwhile, Fortinet also holds a 20% share of the fast-growing software-defined wide area network (SD-WAN) hardware appliance market, second only to Cisco Systems, which controls 25% of this space. The demand for SD-WAN cybersecurity is estimated to increase at an annual rate of 21% over the next 10 years, which bodes well for Fortinet given its share of this market.
In all, it is not surprising to see why Fortinet management expects to hit $8 billion in annual revenue by 2025 at a compound annual growth rate of 22%. Investors, however, can expect this cybersecurity stock to keep up that momentum for a longer time considering the catalysts discussed above, which is why they might want to consider buying this stock-split play and holding it for a long time to come.
