To The Moon

$Fortinet(FTNT)$

Following a sharp sell-off in recent days, Fortinet (NASDAQ: FTNT) has returned to the spotlight as investors assess whether the cybersecurity giant’s current valuation presents an opportunity or a warning sign. While the long-term growth story remains compelling, recent earnings trends indicate that the company may be entering a slower growth phase—one that demands a more disciplined view on price.

Performance History and Growth Profile

Fortinet’s public history dates back to 2010, with growth accelerating meaningfully only in recent years. While early performance was uneven, the company’s momentum shifted in 2018—helped in part by broader corporate tax cuts in the U.S.—and sustained into the early 2020s.

Operating within the cybersecurity software sector, Fortinet has grown into a $56 billion market-cap leader even after the recent decline in share price. Between 2018 and 2022, the company consistently delivered exceptional earnings growth, with most years exceeding 30% and even touching nearly 50% in 2022.

This kind of sustained high growth attracted premium valuations. When I initiated a position in May 2022, Fortinet’s trailing P/E ratio stood near 57, but strong earnings expansion quickly compressed that multiple to the low 40s by year-end. At the time, the company fit squarely within my “growth strategy” framework—a buy-and-hold approach designed for businesses with durable, above-average expansion rates.

Why I Reduced My Position

Earlier this year, earnings momentum slowed materially. 2024 earnings growth came in at just 6%, a stark deceleration from the prior multi-year average. Analyst estimates now call for a more normalized 11–13% annual growth rate over the next two years. While still healthy, this represents a fundamental shift from Fortinet’s prior “fast growth” classification.

A 30x forward earnings multiple is not unreasonable for a company growing in the low teens. However, when the same multiple applied to a business growing 30–50% annually, the valuation looked much more compelling. With this slowdown, the risk of multiple compression became significant.

For that reason, I chose to sell half my position earlier this year—just prior to the recent sharp drop—locking in nearly a 100% gain over a three-year holding period. The remaining half remains in my portfolio to capture any potential earnings surprises that could re accelerate the growth trajectory.

Valuation Framework: The “Time Until Payback” Method

One of my preferred valuation approaches is the “time until payback” method, which estimates how long it would take for a company’s cumulative earnings to equal the purchase price of the stock.

Using analysts’ forward EPS estimate of $2.50 and a forward P/E of 30, Fortinet’s earnings yield stands at approximately 3.35%. Assuming 12% annual earnings growth—midpoint of consensus forecasts—the model projects a 13-year payback period at current prices.

For context, I consider a 10-year or shorter payback attractive for a company growing in the low teens, while 15 years is a potential signal to reduce exposure. When I sold at roughly $100 per share, the payback period was near that 15-year mark.

When Would I Buy Again?

At 12% growth, my model suggests an attractive reentry point would be closer to $45 per share, corresponding to a 10-year payback horizon. Historically, Fortinet traded at these levels as recently as 2022. Even after the recent sell-off, the stock remains above that range, implying further downside may be needed to align valuation with growth prospects.

A price under $50 would start to make the stock compelling again, particularly if technical support holds in the mid-to-high $40s. Any unexpected acceleration in earnings growth—say, back toward the 20–25% range—could warrant reevaluating that target.

Bottom Line

Fortinet remains a high-quality player in the cybersecurity space, but the investment case has shifted from a hyper-growth narrative to a more mature, normalized growth story. At current valuations, the risk-reward balance does not yet favor aggressive accumulation.

Long-term investors who believe the company can reignite growth may view the recent pullback as a chance to establish or add to a position. My own approach is to hold my reduced stake while waiting for a more attractive price—ideally under $50—before committing additional capital.