A week ago, Fortinet, Inc. (NASDAQ:FTNT) came out with a strong set of first-quarter numbers that could potentially lead to a re-rate of the stock. It was overall a positive result, with revenues beating expectations by 4.1% to hit US$577m. Fortinet also reported a statutory profit of US$0.60, which was an impressive 119% above what the analysts had forecast. The analysts typically update their forecasts at each earnings report, and we can judge from their estimates whether their view of the company has changed or if there are any new concerns to be aware of. We've gathered the most recent statutory forecasts to see whether the analysts have changed their earnings models, following these results.
Taking into account the latest results, the consensus forecast from Fortinet's 27 analysts is for revenues of US$2.49b in 2020, which would reflect a decent 10% improvement in sales compared to the last 12 months. Statutory earnings per share are predicted to rise 2.2% to US$2.22. Before this earnings report, the analysts had been forecasting revenues of US$2.48b and earnings per share (EPS) of US$1.83 in 2020. There was no real change to the revenue estimates, but the analysts do seem more bullish on earnings, given the very substantial lift in earnings per share expectations following these results.
The analysts have been lifting their price targets on the back of the earnings upgrade, with the consensus price target rising 6.3% to US$125. Fixating on a single price target can be unwise though, since the consensus target is effectively the average of analyst price targets. As a result, some investors like to look at the range of estimates to see if there are any diverging opinions on the company's valuation. The most optimistic Fortinet analyst has a price target of US$150 per share, while the most pessimistic values it at US$91.00. Analysts definitely have varying views on the business, but the spread of estimates is not wide enough in our view to suggest that extreme outcomes could await Fortinet shareholders.
Another way we can view these estimates is in the context of the bigger picture, such as how the forecasts stack up against past performance, and whether forecasts are more or less bullish relative to other companies in the industry. We would highlight that Fortinet's revenue growth is expected to slow, with forecast 10% increase next year well below the historical 19%p.a. growth over the last five years. Juxtapose this against the other companies in the industry with analyst coverage, which are forecast to grow their revenues (in aggregate) 12% next year. Factoring in the forecast slowdown in growth, it looks like Fortinet is forecast to grow at about the same rate as the wider industry.
The Bottom Line
The biggest takeaway for us is the consensus earnings per share upgrade, which suggests a clear improvement in sentiment around Fortinet's earnings potential next year. Happily, there were no real changes to sales forecasts, with the business still expected to grow in line with the overall industry. We note an upgrade to the price target, suggesting that the analysts believes the intrinsic value of the business is likely to improve over time.
Following on from that line of thought, we think that the long-term prospects of the business are much more relevant than next year's earnings. We have forecasts for Fortinet going out to 2024, and you can see them free on our platform here.
Even so, be aware that Fortinet is showing 1 warning sign in our investment analysis , you should know about...
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