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Fortinet Stock Appears To Be Significantly Overvalued

·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 $221.76 per share and the market cap of $36.2 billion, Fortinet stock appears to be significantly overvalued. GF Value for Fortinet is shown in the chart below.


Fortinet Stock Appears To Be Significantly Overvalued
Fortinet Stock Appears 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 17.24% annually over the next three to five years.

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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 2.98, which ranks in the middle range of the companies in Software industry. Based on this, GuruFocus ranks Fortinet's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Fortinet over the past years:

Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Fortinet has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.7 billion and earnings of $2.96 a share. Its operating margin is 19.45%, which ranks better than 87% of the companies in Software industry. Overall, the profitability of Fortinet is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Fortinet over the past years:

Fortinet Stock Appears To Be Significantly Overvalued
Fortinet Stock Appears 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 83% 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 18.49 while its WACC came in at 8.46.

In closing, the stock of Fortinet (NAS:FTNT, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair 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.

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This article first appeared on GuruFocus.