This tech stock has gone parabolic and you should consider buying it before it rises even higher

Fortinet (FTNT 0.58%) released its 2024 second-quarter results on Aug. 6, and shares have rallied a massive 35% since then, thanks to impressive revenue and earnings growth that were enough to help it beat Wall Street expectations.

The cybersecurity specialist also raised its full-year revenue guidance. This further explains why the stock has made a parabolic move, a phenomenon that refers to the rapid increase in a company’s stock price over a short period of time, much like the right side of a parabolic curve.

The good news for investors is that Fortinet shares could continue to rise, thanks to the company’s focus on tapping fast-growing niches in the cybersecurity market, which should allow it to take advantage of a massive addressable market in the long term.

Fortinet’s growth is likely to improve

Fortinet generated revenue of $1.43 billion in Q2, an 11% increase over the same quarter last year. Its non-GAAP net income grew at a much faster pace of 50% from the year-ago quarter to $0.57 per share due to fewer shares due to buybacks, lower overhead costs and demand growing for its higher margin. security subscription offers.

Fortinet’s non-GAAP operating margin increased from 26.9% to 35.1% as the proportion of service-based revenue increased year over year. More specifically, Fortinet’s services revenue grew nearly 20% year-over-year to $982 million, accounting for 69% of the top line. That was an improvement over the same quarter last year, when service revenue made up 63% of the top line.

There’s still plenty of room for growth in Fortinet’s services revenue, which also means the company’s margin profile could continue to improve. On the bright side, the improvement in Fortinet’s deferred revenue indicates that its revenue from security subscription sales could continue to improve.

The company’s deferred revenue rose 15% year over year to $5.9 billion in the second quarter, outpacing growth in its top line. This value refers to money that is collected in advance by a company for services that will be provided in the future. Once Fortinet provides these services, it will be able to recognize the deferred revenue in the income statement as actual revenue.

With the company expecting its addressable market to reach $228 billion in 2028, there is plenty of room for Fortinet to grow, given that its 2024 revenue is expected to reach $5.85 billion dollars. That would be a 10% increase over last year, but as the following chart indicates, Fortinet’s growth is expected to continue.

FTNT Revenue Estimates for Current Fiscal Year Data by YCharts

Is the stock worth buying now?

Fortinet is now trading at 44 times trailing earnings after its hot rally. That’s slightly lower than the US tech sector’s average price-to-earnings ratio of nearly 46. Fortinet’s forward earnings multiple of 39 points to an improvement in its bottom line, and the bright side is that analysts now expect a bottom stronger. line performance from the company.

FTNT EPS estimates for current fiscal year data by YCharts

The outlook for the next five years is also bright, with Fortinet expecting to post an annual earnings growth rate of 15%. So let’s do some math.

Assuming it can indeed achieve such solid growth amid the huge affordable opportunity it has, its earnings could rise to $4.10 per share five years from now (using estimated fiscal 2024 earnings of $2.04 per share as basis).

The Nasdaq-100 the index has an average forward price-to-earnings ratio of 29 (using the index as a proxy for technology stocks). Assuming Fortinet trades at a similar multiple five years from now (which would be a significant discount to its current earnings multiple), its share price could rise to $119 (based on estimated earnings of $4.10 per share calculated above).

These calculations point to a 58% upside from current levels, which is why investors may want to consider buying this cybersecurity stock despite its recent extraordinary gains.