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Info@NationalCyberSecurity

Fortinet Is Building a New Cybersecurity Service With Google Cloud — Time to Buy This Beaten-Down Stock? | #hacking | #cybersecurity | #infosec | #comptia | #pentest | #ransomware


Big cybersecurity pure play Fortinet (FTNT -1.67%) took a beating after its last earnings update in August 2023. After a hot growth streak during the pandemic-fueled cycle of data center upgrades (in support of a big pivot to cloud computing), Fortinet is slowing down. Investors took the opportunity to take some profit in the richly valued stock.

But Fortinet isn’t idly sitting by and hoping that its unified network security hardware and software business will rebound. The company has been quietly making a push into a new realm of cybersecurity, and it just announced a new partnership with Alphabet‘s (GOOGL -1.26%) (GOOG -1.21%) Google Cloud to further its efforts. Is it time to buy the dip in Fortinet stock?

Fortinet’s big move into software services

Fortinet has long had a secret weapon in the cybersecurity market. Not only does it design firewalls — network security devices that monitor network traffic — but it also designs proprietary chips that power them. It calls these Security Processing Units, or SPUs, a type of CPU customized for security purposes.

This has helped Fortinet crank out best-in-class security hardware, which customers purchase to secure physical locations (everything from a data center to an office building to a retail store), and which gets bundled together and operates with its software services (the recurring subscription-based revenue part of Fortinet).

Segment

First Half 2023

Increase (YOY)

Products (hardware and security infrastructure)

$473 million

18%

Service (including recurring software subscription)

$820 million

30%

Data source: Fortinet. YOY = year over year.

The stock fell hard this past summer because its high valuation was paired with a downgrade to management’s near-term growth outlook. Expectations for full-year 2023 billings (the value of invoices sent to customers) were reduced by a couple hundred million dollars, to a range of $6.49 billion to $6.59 billion, as some customers have slowed spending and signing new contracts this year. The revised guidance implies Fortinet’s overall revenue expansion will sink below the 20% mark.

But not all is lost, as Fortinet still expects to see double-digit percentage growth for the foreseeable future. The new Google Cloud deal illustrates the big opportunities that still lie ahead for the company.

Specifically, Fortinet is expanding its points-of-presence (POPs) for its secure access service edge (SASE, pronounced “sassy”) security service, called Fortinet Universal SASE.

What exactly is SASE?

SASE is a type of security architecture first labeled as such by tech researcher Gartner in 2019. SASE refers to the unification of network hardware and security software-as-a-service (SaaS), combining multiple technologies into one converged security solution.

The idea behind SASE is to provide a holistic security service that a company can deploy to all of its operations — such as an office building, a location remote from a main campus, employees working in the field or from home, a data center supporting a company’s private cloud apps, and public cloud services.

Fortinet, along with many other cybersecurity leaders like Palo Alto Networks (PANW -0.15%), was quick to start building out SASE. Fortinet’s legacy of best-in-class hardware is a great start in this arena. But to fully meet the definition of SASE, a security service must be cloud-based (located in a data center) and globally distributed. That’s where Google Cloud comes in.

Is Fortinet’s SASE the real deal, or is it just getting sassy with the competition?

To boost its competitiveness, Fortinet will use Google Cloud’s dozens of POPs (small data centers located in strategic markets close to end users) to expand its Universal SASE. Presumably, this will rely heavily on Fortinet’s own SPU-powered firewalls, and it could really up the game for Fortinet’s SASE service.

This past summer, Gartner named Fortinet a challenger in this realm of next-gen cybersecurity, along with a couple of private start-ups. But big security pure-play Palo Alto Networks was named the only leader in this department. Fortinet together with Google Cloud could narrow that gap.

This deal looks like a win-win. Google Cloud lands a bigger customer in Fortinet for its cloud infrastructure, and Fortinet gets some global computing power for one of its marquee services. I own both Alphabet and Fortinet stock, and I plan to hold both for the long term.

But what of Fortinet’s slowdown? Perhaps the buildout of its Universal SASE will help this security leader reignite conversations with existing and potential customers. After all, the cadence of data breaches and cybersecurity incidents isn’t abating. Businesses around the world continue to get exposed as being deficient in data security. There’s no shortage of demand for services like Fortinet Universal SASE.

But only time will tell if Fortinet’s slowdown is a sign of a permanent tapering-off in growth, or just a lull due to weakening economic conditions in 2023. I believe Fortinet is still in good shape, and has a new growth lever to pull on with this upgraded Google Cloud partnership.

Nevertheless, bear in mind that Fortinet stock does still trade for a high premium. As of this writing, the share price values the company at 44 times trailing-12-month earnings, or 29 times trailing-12-month free cash flow. Suffice it to say the market still has high hopes for Fortinet. As with some other premium-priced stocks, consider using a dollar-cost average plan to build a position over time, if you think Fortinet still has years of growth prospects ahead.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Nicholas Rossolillo and his clients have positions in Alphabet, Fortinet, and Palo Alto Networks. The Motley Fool has positions in and recommends Alphabet, Fortinet, and Palo Alto Networks. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

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