Beyond Firewalls: Fortinet’s Vision for Cyber Dominance (Part 1)
For our March deep dive, we’re analyzing Fortinet Inc. (FTNT), a key player in next-generation firewall cybersecurity.
As part of this year's goal to consolidate our portfolio and explore complex yet critical industries, we’re diving into new sectors to broaden both our own knowledge and that of our readers while ensuring our portfolio remains strategically positioned for the future.
Our paid subscribers received an update in the chat on Friday, March 14, where we detailed the portfolio adjustments made following the recent market drawdown.
Cybersecurity is a fast-growing industry with secular tailwinds that should keep Fortinet on a strong growth trajectory. We believe AI strengthens security needs, making this an even bigger opportunity. The recent acquisition by Alphabet of cybersecurity firm Wiz, raising its offer from $23 billion last year to $32 billion, further highlight the sector’s momentum. With so much happening, sitting on the sidelines may not be the best long-term strategy.
This report on Fortinet’s business model turned out longer than expected, but we found the additional depth necessary for better understanding. Therefore, the sections on Management, Industry, Financial Analysis, Competitive Advantages, Valuation, and Conclusion will be covered in Part 2, releasing next week. Paid subscribers will also receive the full report in a pdf.
Without further ado, let’s dive in.
1. Key Facts
Description: Fortinet Inc. (“FTNT”, “Company”) is a cybersecurity leader, pioneering the convergence of networking and security. Its integrated platform, Fortinet Security Fabric, spans secure networking, AI-driven security operations (SecOps), and unified SASE to protect people, devices, and data. Founded in 2000 and headquartered in California, Fortinet delivers high-performance cybersecurity solutions to enterprises, service providers, government agencies, and SMBs, offering automated protection, detection, and response across the digital attack surface.
Key Financials: Over the period FY15 to FY24, the Company depicted a revenue Compound Annual Growth Rate (“CAGR”) of 21.8% and operating income CAGR of 61.4%, reaching an FY24 revenue of $5.96 billion and operating income of $1.8 billion (margin of 30.2%). Fortinet has cash and short term investments of $4.07 billion compared to total debt and lease liabilities of $1.07 billion.
Price & Market Cap (as of 17th March 2025): Its market cap is $74.3 billion with a 52-week low of $54.6 and a 52-week high of $114.8, whereas it currently trades at $96.7.
Valuation: Fortinet trades at a NTM EV/EBITDA of 30.7x (5 Year average of 32x) and a NTM EV/Sales of 10.5x (5 Year average of 9.5x).
2. Business Overview
a. History
Fortinet was founded in 2000 by brothers Ken Xie (CEO) and Michael Xie (CTO), launching its flagship FortiGate firewall as its first product in 2002. The next-generation firewall (NGFW) was a major technological leap, introducing deep inspection and advanced detection features, surpassing traditional network firewalls that merely acted as gateways between local area networks (LAN) and the internet. Over time, FortiGate evolved to integrate capabilities such as IPS (Intrusion Prevention System), VPN support, and application control, enhancing security beyond basic packet filtering.
Over the next two decades, Fortinet expanded beyond firewalls, transforming into a comprehensive cybersecurity platform that includes SD-WAN, cloud security, endpoint security, wireless access points, sandboxing, email and web security, and more. This expansion led to what the company now calls the “Fortinet Security Fabric”—an integrated suite of security and networking solutions. Today, the Fabric spans over 50+ enterprise cybersecurity products and serves more than 830,000 customers worldwide.
Fortinet Security Fabric Portfolio
Source: Investor Day March 2025
Ken Xie, who still serves as CEO, was born in China and previously founded NetScreen in 1996, an ASIC-based firewall pioneer that Juniper Networks acquired for $4 billion in 2004. His deep industry experience played a crucial role in shaping Fortinet’s early strategy.
By 2004, Fortinet had rapidly expanded its presence across Asia, Europe, and North America and by 2008 the company turned profitable. In 2009, it went public. Since its IPO and taking into account its five-for-one stock split in June 22, 2022, Fortinet has delivered a 5,708% total return to shareholders, translating to a 30%+ CAGR over more than 15 years, making it one of the largest pure-play cybersecurity companies.
Source: FinChat.io (affiliate link with a 15% discount for StockOpine readers)
While Fortinet’s growth has been primarily organic, it has also pursued strategic acquisitions to enhance its offerings. Recent acquisitions include Lacework and Next DLP, which we will cover later.
Despite its leadership in cybersecurity, Fortinet itself has faced security breaches. Notable incidents include:
A critical authentication bypass vulnerability in FortiOS VPN (2021), which resulted in 500,000 login names and passwords being leaked on hacking forums.
A 2022 breach (CVE-2022-40684), where a hacker group obtained data from 15,000 Fortinet firewalls, allegedly linked to a state-sponsored actor.
Most recently, the company announced patches for new zero-day vulnerabilities (CVE-2024-55591), affecting FortiOS and FortiProxy.
These incidents underscore a critical challenge in the cybersecurity industry, i.e. even leading security providers remain targets of malicious attacks. Ultimately, in this industry, trust is everything, and losing customer confidence is a key risk Fortinet and its peers must constantly mitigate.
b. Business model
Fortinet operates through a two-tiered distribution model, selling its security solutions to distributors, including Arrow Electronics, Inc., Exclusive, Ingram Micro, and TD Synnex, who then supply network security-focused resellers, service providers, and Managed Security Service Providers (MSSPs). These resellers and service providers, in turn, sell to end-customers or use Fortinet’s products and services to offer hosted security solutions to other enterprises.
This distribution model has played a crucial role in Fortinet’s broad market reach, particularly in the SMB (Small and Medium-Sized Business) segment, which, despite not driving large enterprise deals, remains the backbone of economies, making it a key market for Fortinet’s security solutions. The Company’s strong firewall unit shipments and market leadership (see image below) stem in part from its ability to efficiently serve this segment.
Distributors are critical to Fortinet’s strategy, as in 2023 and 2024, sales from the top three distributors made up 57% and 56% of total revenue, highlighting Fortinet’s dependence on this network. However, distributors do not necessarily hold significant bargaining power in this relationship. Historically, vendors have switched distributors when necessary, with new distributors often eager to invest in the vendor’s growth to capture market share.