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Fortinet Is Priced For Perfection

Mar. 05, 2018 10:53 AM ETFortinet, Inc. (FTNT)4 Comments
Kelly Stewart profile picture
Kelly Stewart


  • Fortinet is priced for perfection. Stocks rarely achieve perfection.
  • Investors shouldn't pay so handsomely for that uncertain growth.
  • With a 1y forward P/E of ~30.51, Fortinet has a price-implied one-year earnings growth expectation of 918%. I think that is significantly over-optimistic.
  • Fortinet doesn't beat the risk-free rate. At the moment, the earnings yield for Fortinet is 0.36%. 36 basis points, vs. the ~222 basis points provided by a two-year t-bill.

Fortinet (NASDAQ:FTNT) is a threat management and network security solutions provider. In some ways, it has done well over the past decade, delivering 500% price growth and nearly the same amount of revenue growth over the same period.

It's also significantly overpriced on a price-to-earnings basis and priced optimistically when I look at its forward P/E. This suggests that investors are paying handsomely for Fortinet's uncertain returns. I don't believe this offers investors with sufficient risk-reward. As investors - in my opinion - the preservation of capital should be our biggest concern. The best way to do that is to avoid investing in overvalued companies like Fortinet that may be priced for perfection.


As Investopedia writes in its excellent article on dilution:

Dilution can drastically impact the value of your portfolio. Adjustments to earnings per share and ratios must be made to a company's valuation when dilution occurs. Investors should look out for signals of a potential share dilution and understand how their investment or portfolio's value may be affected.

As my readers by now know better than anything, when a company issues additional shares, an existing investor's proportional ownership in that company is reduced.

Over the past five years alone, Fortinet has diluted its shares by 5.88%.

FTNT Average Diluted Shares Outstanding (Annual) data by YCharts

To demonstrate the impact dilution may have on ownership stake, let's go back to our thought experiment, and say you buy 100 shares of Fortinet today at ~$50.46, when Fortinet has 168.02m shares outstanding.

Source: Author's Work

Let's say, over the next five years, Fortinet doubles its revenue; and, let's say, that because Fortinet investors love to reward revenue, the stock price reflects that. Let's also assume that, during that time, Fortinet has issued 6% more shares (as per the previous five years), so now there are 45.22m shares outstanding.

This article was written by

Kelly Stewart profile picture
Check out my tipranks: https://www.tipranks.com/bloggers/kelly-stewartContrarian. Former CEO of a small publishing company. I've been researching stocks for several years now, and my philosophy is geared towards the preservation of capital as the most important goal of investing.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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