FortinetInc. Analysis

FortinetInc&quot Company is a multinational organization based in the UnitedStates of America. The company was established in the year 2000 bytwo brothers namely Xie Michael and Ken. Headquarter of the FortinetInc. is in Sunnyvale in California. Besides, it is a public listedcompany on the New York Stock Exchange. The company has employed over4000 employees with a revenue base of over $ 615.3 million as atDecember 2013 and it reported a total asset worth 1.16 billiondollars in 2013 and a total equity of $588 million. The maincustomers of Fortinet are schools, tertiary institution, corporationsand individual clients. The company focuses on selling securityperformance network products and services such as firewalls,antivirus, antispyware, and wireless security systems and it hasthree major Wireless Local Area Network products, which includeFortiWiFi, WLAN, and FortiAP. Fortinet ensures that all its productsconform to ISO certification quality standards with an aim ofguaranteeing their customers with quality goods and services (Cheng,Hussain, &amp Millet, 2014).

Thecompany operates under computer network security. It distributesproducts to its clients using partnered distribution channel methodto over twenty thousand partners across the world. The ability tohave a strategic distribution channel has been a major source ofstrength to Fortinet Company. It has made the organization to becomea market leader in production and distribution of solutions forthreat management. Fortinet is the third largest market share insecurity appliances after Check print and Sisco Company. Its maincompetitors operate under the Unified Threat Management (UTM)industry as well as in the network security industry. The maincompetitors of Fortinet Company include McAfree, Inc and CISCO systemInc. Juniper Networks, Zango, and Trend Micro (Cheng, Hussain, &ampMillet, 2014). Therefore, the study focuses on conducting investmentanalysis for Fortinet Inc company to see whether it represent aviable venture for investment.


Investmentsanalysis is the process of evaluating the viability of particularinvestment to identify out the risk, income, and the value that aninvestor can obtain. Investment analysis is carried out to find outhow a given asset may be able to suit in a particular portfolio.Investment analysis focuses on evaluating three main factors namelyresale value, risk, and cash flows/revenues. Resale value is one ofthe three components that are assessed during investment analysis.When an asset is bought and later sold at a higher value, the valuesobtain is usually referred to as gain on disposal. During the processof investments analysis, an investor may want to know the rate ofgrowth of the asset being disposed of and ensure that the valueobtained is significantly higher than the cost incurred duringacquisition (Millet, 2015).

Thesecond factor assessed during investment analysis is the risk. Aninvestment analyst evaluates the level of risk prior to making anyinvestment decision. However, during investments analysis, oneshould not solely rely on risk as a single factor to assessinvestments but should consider other factors such as resale valueand anticipated cash flow from a project. Considerations of all thefactors that may affect investments help an investor to make aninformed decision pertaining particular investments. Finally, duringinvestment analysis, an investor should also take into account cashflows that a given project is likely to generate. The existingmethods of investments analysis can be applied to all types ofinvestments including stocks, real estates, bonds, businessacquisitions, treasury bills to mention just but a few (Brown, 2012).

FortinetInc. Analysis

  1. Financial Performance

Thefinancial performance focuses at evaluating the financial position ofthe company by looking at the income statements, balance sheet, andcash flow statement. Based on the Income Statement of Fortinet Inc,it can be observed that over the last three years namely 2013, 2014and 2015, sales were $615.3 million, $770.4 million and $1009.3million respectively. The sales values indicate that 2015 had thehighest sales value followed by 2014 and finally 2013. The increasein sales shows that the company sales performance has been improvingeach year. It also indicates that the firm has managed to have alarger market share. Besides, the Net Income over the last threeyears namely 2013, 2014 and 2015 decreased progressively. Forexample, in 2013 the net income was $44.3 million, but it dropped to$25.3 million and $8.4 million in 2014 and 2015 respectively. Adecrease in net income is an indication that the company isincreasing its variable expenses. Fortinet Company should considerminimizing its variable overheads to obtain higher net revenues inthe future (Churet, &amp Eccles, 2014).

Basedon the cash flow statements it can be seen that cash flow fromoperating activities has been increasing each year. For example, in2013, 2014 and 2015 the company reported cash flow from operatingactivities of $137.4 million, $196.6 million and $282.5 millionrespectively. Increased cash flows from operating activities implythat the firm is utilizing its fixed asset to generate more returns.Besides, Fortinet Company had higher free cash flow in each yearwhich indicates that the value of the company increased significantlyfrom 2013 to 2015. Based on the quarterly data it is evident that thefinancial performance of Fortinet Company will improve significantlyby the end of 2016. Based on Fortinet balance sheet, it can beobserved that the company had a total asset of 1,790.5 million andtotal liabilities of $1035.1 million as at 31st December 2015.However, within the first quarter of 2016, the total asset increasedto $1811.5 million while the total liabilities increased to $1069.1million. Such changes indicate that the liquidity position ofFortinet Company has been improving. It also show the company abilityto meet its short-term obligation has been improving (Churet, &ampEccles, 2014).

  1. Benchmarking Analysis

Benchmarkinganalysis focuses on comparing the performance of the target companyagainst the comparable companies operating within the same industry.In this case, the performance of Fortinet Inc was compared with thatof its competitors in the industry. It can be observed from Benchmark1 in the Excel sheet that the Equity and enterprise value of FortinetCompany was $5,423 million and $4229 million respectively. Its valuewas lower that all its comparable companies apart from Fire Eye Incwhose equity value was much less than all the companies underconsideration. The lower equity value is an indication that itsordinary shares are not performing well about other comparablebusinesses in the computer network Security industry. Also, the salesvalue and gross profit of Fortinet Company was lower than that ofJuniper Netw, F5 Networks, and Palo Alto (Rosenbaum, &amp Pearl,2013).

However,its sales and gross profit value were higher than that of Fire EyeInc as shown the Excel under Benchmark 1 section. Besides, theearnings before interest tax and depreciation for Fortinet Companywere greater than that of comparable companies such as Palo Alto Netand Fire Eye Inc. However, the value of EBITDA was lower as comparedto Juniper Netw, F5 Networks, and Open Text. Based on theprofitability margin and growth rates Fortinet Inc Company had lowerprofitability margin and growth rates than F5 Networks and Palo AltoNet. Besides, Fortinet Company had lower ROIC, ROE, ROA and lowerdividend yield than Jupiter, F5 Networks, and Open Text. Also, thecompany had lower Net Debt compared to all the comparable companies(Rosenbaum, &amp Pearl, 2013).

  1. Company Valuation

Valuationof the company may be based on two major elements represented in theexcel data sheet namely the enterprise value over sales and earningsper share. Based on the company enterprise value it can be observedthat the enterprise value of sales was higher in 2016 as compared to2017 in the 25th and 75th percentiles. For example, in 2016 under25th and 75th percentile the enterprise value over sales was 3.2x and4.3x respectively. However, in 2017 under the 25th and 75thpercentile, the enterprise value decreased to 2.6x and 4.0respectively. The decline indicates that the value of Fortinet tosales was declining. Besides, the price-earnings ratio for FortinetInc dropped from 11.2 x in 2016 to 10.3x in 2017 in the 25thpercentile. It continued to fall in the 75th percentile from 16.5 xin 2016 to 14.9x in 2017. Such decline shows that the companyshareholders are obtaining more dividends at the expense of capitalgains (Fernandez, 2015).

  1. Multiple Share Valuation

Discountedcash flow method uses the future cash flow to evaluate theeffectiveness of project (Fernandez, 2015). Fortinet Inc. The companyis expected to have revenue compounded annual growth rate (CAGR) of26.2% which sees its sales increase from $533.6 million in 2012 to$3, 225.7 million in 2020. Using perpetuity growth method, FortinetInc. is valued at $311,762.7 million while using the exit multiplemethod it is valued at $2,186.1 million. The implied exit multiple ofthe company is 1,472.5x, and the implied perpetuity growth rate is-22.5%. This shows that the company would bring higher value to theinvestor. The industrial growth is expected to be 6.2%. On the otherhand, Fortinet Inc. is expected to grow at 8.6%. This means that thecompany is expected to grow at a higher rate than the industrialaverage and more than most of its peers.

Theimplied equity value and share price are $312,306.0 million, and$1,819.54 million respectively. When using the exit multiple method,the implied share price of the company is $15.90 million. This showsthat the share price of the company is undervalued, and there is ahigher chance of capital gain in the market. The average impliedshare price from perpetuity growth method and exit multiple method ofthe Fortinet Inc. Company is $1,819.54 million. The current shareprice of the company is $311.18 million compared to the market priceof $31.95 million. This shows that the share price is highlyundervalued. Investing in the shares of the company would prove to bea good investment opportunity. With an average expected sales growthof 20%, the company will be able to expand its total marketcapitalization, and increase its worth by the year 2020. This meansthat using the multiple share valuation method, the current value ofthe Fortinet Inc. is projected to increase over the years, and assuch, it represents a good investment opportunity (Lyons, 2015).

  1. Net working Capital Analysis

Workingcapital indicates the liquidity of the company. In essence, it showsthe extent to which the company can be able to meet its short-termobligation using its short-term assets (Kieschnick, et al., 2013). Aviable company should have a stable working capital where the currentassets exceed the current liabilities (Bierman &amp Smidt, 2012).However, having too much cash or holding too much current assetsrelative to current liabilities indicates that the company islimiting its ability to expand. As such, the company should have abalanced cash flow. For the Fortinet Inc., the current assetsincreased from $141.9 million in 2015 to $379.2 million in 2015. Thisrepresents 152.3% growth over a period of 4 years. On addition, thecurrent assets of the company are projected to grow from $420.7million in 2016 to $1,067.9 million in 2020. This is expected to becontributed mainly by the growth in inventory. This indicates thatthe company is expanding its current assets, which increases thevalue for the shareholders.

Onthe other hand, the current liabilities of the Fortinet Inc. grewfrom $141.9 million in 2012 to $678.7 million in 2015 representing$164.25 million growth. This is a higher growth than the growth inthe current assets, which indicates liquidity challenges. The companyprojects to have $680.5 million in 2016, which will increase to$1,727.5 million by 2020. In overall, the company does not have ahealthy net working capital. The net current liabilities exceed thecurrent assets for all the years. However, the company net workingcapital is expected increase by $168.7 million between 2019 and 2020.The company needs to have optimal working capital management toensure that it has smooth operations.

  1. Fortinet Inc. Cost of Capital Analysis

Thecost of capital (WACC) is the cost of financing the business. Most ofthe entities combine equity and debt as a source of the capital. Toget the cost of capital, the weighted average of all the sources isobtained (WACC). The cost of the capital for a company usuallyrepresents a hurdle which the entity has to overcome to generatevalue. A higher cost of capital signals higher risk for the firmsoperations (Schlegel, 2015). Fortinet Inc. relies on equity tofinance its operations. Given that, there is no outstanding cost ofdebt, the cost of equity is the company’s overall cost of capital.The company has the cost of the capital of 8.7%. The cost of capitalis relatively low, indicating that the company has a low level ofrisk, which is linked with the operations of the company.

8.7%represent the required rate of return, which is demanded by theinvestors from the company. The cost of capital of the Fortinet lower than its actual return. This is an indication that thecompany is gaining value. For the investors, the company with higherWACC than the actual returns indicates that it is lowering its value,and there is a likelihood that there exist more efficient returnsthat are available in the market. As such, they will tend to investtheir money in other companies that have a positive future projectionand high value. For this, reason the WACC of the Fortinet Inc. isconsiderably efficient for the investors. However, the company failsto use debt financing which is tax efficient as compared to using theequity source of fund. However, even though dividends are not taxdeductible, like the interest expense, there is no risk of defaultfor the Fortinet Inc. and thus represent a good investmentopportunity for risk-averse investor.

  1. Fortinet Inc. Risk Analysis

Riskanalysis involves evaluating uncertainties and risks that areencountered by the company in the line of business. Risks emanateeither internally from the company or externally from the businessenvironment. Carrying out a risk analysis helps the company toidentify the extent to which it is exposed to risk and the way inwhich the risks can be hedged. Beta is used to get the company’srisk. Beta measures the systematic or the volatility of the securityin comparison with the market (Cox, 2012). As such, a high betaindicates that the security is more volatile compared to the marketproxy (which is an indicator of the average market performance). Thelevered beta for the Fortinet Inc. is 1.28. This is equal to theaverage beta for its peers.

Thebeta for the Fortinet Inc. is lower than that of some of its peerssuch as F5 Networks, Inc. (FFIV) and Juniper Networks, Inc. (JNPR),which has betas of 1.98 and 1.95 respectively. However, the companyis riskier than Palo Alto Networks, Inc. (PANW) and Open TextCorporation (NASDAQ: OTEX) which have the betas of 1.15 and 0.42respectively. This indicates that the company level of risk isaverage and as such, it would be appealing to both risk averse andrisk takers. Given that the beta of the Fortinet Inc. is more thanone it means that the price volatility of the security is more thanthat of the market. Theoretically, given that the Fortinet Inc. has abeta of 1.28. It can be considered 28% more volatile than the market.However, an added risk over the market is an indication that thecompany has a likelihood of offering a higher rate of return.

Conclusionand Recommendation

Historically,Fortinet Inc. has registered average performance. Even though thecompany revenue is projected to in case by 26.6% over the next fiveyears, it has a limited ability to convert this growth into owners’returns. On addition to this, the company has unhealthy workingcapital. This means that it has a limited ability to finance itsshort-term debt using the current assets. The company does not havelong-term debt payment obligations, which means that it relies onshort-term liabilities to finance its operations and expansionprojects. This is very risky because it raises its inability to meetthe debt payment obligations. Even though the company’s securityhas average beta compared to its peer, it is relatively more volatilethan the other companies (as given by its high volatility comparedmarket –a beta of above one). This means that Fortinet Inc. Doesnot present an investment opportunity with high returns and it isrecommendable for risk-averse investors who want to have averagereturns


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