KeyBanc's Confidence In Fortinet's Margin Targets Falls

Shares of Fortinet Inc FTNT have gained 23 percent since the start of 2018 and 45 percent over the past year, which implies the stock's valuation is full, according to KeyBanc Capital Markets. 

The Analyst

KeyBanc's Rob Owens downgraded Fortinet's stock rating from Overweight to Sector Weight with no assigned price target.

The Thesis

Fortinet's status as a standout in the network security space remains, and the company still faces a compelling emerging cloud opportunity, Owens said in the downgrade note. But after multiple quarters where the company reiterated its long-term targets of 150 to 200 basis points of annual operating margin expansion, Fortinet's recent target "appears to have faded from a resolution to more of a suggestion," the analyst said.

This could result in increased volatility and potential disappointment for investors if the company returns to "spend mode" to gain market share at the further expense of margins, Owens said. 

Fortinet's stock has appreciated to the point where it's trading at 13.3x EV/2019 FCF and 4.2x EV/2019 sales forecast, according to KeyBanc. When adjusted for a multiyear duration for billings, shares are trading at around 21.5x EV/one-year FCF. While this is "not particularly expensive" on a historical or relative basis, the prospect of a more a gradual margin expansion implies the risk-reward profile isn't as favorable as it was in the past, Owens said. 

Price Action

Fortinet shares were falling 2.5 percent at the time of publication Monday. 

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