Will the Linksys JV lift the Fortinet share price?

On 13 September, Fortinet [FTNT] and Linksys announced a partnership to deliver Linksys HomeWRK for Business, Secured by Fortinet, an enterprise solution geared towards home working. The move could boost not only the Fortinet share price but also Zoom [ZM] share price since the collaboration tools under the partnership are optimised for the video conferencing company.

The Linksys system will be natively integrated with Fortinet management systems, enabling IT managers to monitor and diagnose devices connected to the corporate network. Consisting of a WiFi 6 router that replaces an employee's home router, it provides separate networks for personal and business use. The product runs Fortinet’s security stack, which will automatically block malware and ransomware.

The evolution has been in the pipeline since March. The latest release builds on Fortinet’s prior investment in Linksys as well as collaboration over Linksys HomeWRK for Business, Secured by Fortinet. It positions Fortinet to capitalise on the growth of home and hybrid working models that has exploded since the coronavirus pandemic began.

John Maddison, CMO of Fortinet, called the collaboration “the start of a completely new market.” Profit margins in the space are tempting, with Zoom announcing GAAP margin of 28.8% and non-GAAP margin of 41.6% in its most recent report in late August. Fortinet’s cybersecurity rival Proofpoint, meanwhile, announced non-GAAP margins of 81% for the six months to 30 June in its most recent report.

The new product should be available in October. Its pricing is so far undisclosed. Linksys did not respond to Opto queries regarding price information.

With the Fortinet share price currently close to 100 times trailing 12-month earnings, investors will expect it to boost future bottom-line growth to justify this hefty valuation.

How might Fortinet’s share price grow?

Cybersecurity is, without a doubt, a growth industry. A report from Grand View Research, published in April, established the market size at $167.13bn in 2020 and forecast it to grow at a compounded average growth rate of 10.9% to $372.04bn by 2028. The market’s growth has driven a nearly 700% rise in Fortinet’s revenue over the past decade, from $324.70m in 2010 to $2.59bn in 2020.

It’s been a strong year for the Fortinet share price, with gains of 100.6% in 2021 to 1 October when it closed at $298. Having posted steady gains of 83.3% until 30 July, the Fortinet share price then saw accelerated momentum, gaining 11.7% over the first three sessions in August to close at $304.02. The Fortinet share price has since encountered a resistance level around $320 and, in a development that may concern investors, recently fell 7.7% in two sessions from 24 September.

Despite this recent slip, the Fortinet share price has far outstripped the S&P 500 and the Nasdaq this year, which have risen 16% and 13%, respectively. Over the past 12 months, the Fortinet share price has gained 147.8% compared to the Nasdaq’s 31.5% and the S&P 500’s 28.9%.

Fortinet’s diluted income per share has increased by 1,516% in the past three years, from $0.18 in 2017 to $1.92 in 2018, and a further increase to $2.91 in 2020. Analysts at CNN Money yield a consensus EPS estimate of $3.86 for 2021 and $4.46 in 2022. 

Alongside this growth, there has been a steady long-term uptrend in the Fortinet share price. The stock has gained nearly 700% over the past five years and around 275% over the past two. However, in the short term, there are signs of a head-and-shoulders pattern emerging. It will be significant if the Fortinet share price can break through the $311.90 close set on 24 September in order to dispel concerns that its bull run is over.

For the moment, the Fortinet share price is above its 200-day moving average. However, the recent dip has seen the stock slip below its 50-day moving average, which could trigger selling momentum if moves like the Linksys partnership can’t reverse the trend.

With the Fortinet share price currently at its lowest level since mid-August, now could prove a good time to buy the dip, provided the company’s long-term growth potential justifies its high P/E ratio. Among CNN Money analysts, the consensus is to hold the stock, with 13 out of 28 offering this rating. Another 11 rate the stock buy, with two rating it outperform and one apiece offering underperform and sell ratings.