Fortinet Stock Is Believed To Be Significantly Overvalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Fortinet (NAS:FTNT, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $182.77 per share and the market cap of $29.8 billion, Fortinet stock shows every sign of being significantly overvalued. GF Value for Fortinet is shown in the chart below.


Fortinet Stock Is Believed To Be Significantly Overvalued
Fortinet Stock Is Believed To Be Significantly Overvalued

Because Fortinet is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 22.6% over the past three years and is estimated to grow 16.21% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Fortinet has a cash-to-debt ratio of 10000.00, which ranks better than 100% of the companies in Software industry. Based on this, GuruFocus ranks Fortinet's financial strength as 8 out of 10, suggesting strong balance sheet. This is the debt and cash of Fortinet over the past years:

Fortinet Stock Is Believed To Be Significantly Overvalued
Fortinet Stock Is Believed To Be Significantly Overvalued

Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Fortinet has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $2.6 billion and earnings of $2.92 a share. Its operating margin of 18.86% better than 86% of the companies in Software industry. Overall, GuruFocus ranks Fortinet's profitability as strong. This is the revenue and net income of Fortinet over the past years:

Fortinet Stock Is Believed To Be Significantly Overvalued
Fortinet Stock Is Believed To Be Significantly Overvalued

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Fortinet is 22.6%, which ranks better than 82% of the companies in Software industry. The 3-year average EBITDA growth rate is 53.2%, which ranks better than 89% of the companies in Software industry.

One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Fortinet's ROIC is 17.16 while its WACC came in at 8.39. The historical ROIC vs WACC comparison of Fortinet is shown below:

Fortinet Stock Is Believed To Be Significantly Overvalued
Fortinet Stock Is Believed To Be Significantly Overvalued

Overall, the stock of Fortinet (NAS:FTNT, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 89% of the companies in Software industry. To learn more about Fortinet stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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