Fortinet (FTNT) recently made it to Zacks.com’s Most Wanted Stock list. Therefore, you may want to consider some of the key factors that may influence the stock’s performance in the near future.
Shares of this network security company have returned -1.8% over the past month compared to the +0.2% change in the Zacks S&P 500 composite. Industry Zacks Security, which Fortinet belongs to, lost 6.3% over this period. Now the key question is: where could the stock be heading in the near term?
While press releases or rumors about a substantial change in a company’s trading outlook usually “trend” its stock and cause an immediate price change, there are always fundamental facts that ultimately dominate the take. purchase and retention decision.
Revisions to earnings estimates
At Zacks, we prioritize evaluating change in a company’s future earnings projection over anything else. This is because we believe that the present value of its future income stream is what determines the fair value of its stock.
We basically look at how sell-side analysts covering the stock are revising their earnings estimates to reflect the impact of the latest trading trends. And if earnings estimates increase for a company, the fair value of its shares increases. A higher fair value than the current market price stimulates investors’ interest in buying the stock, causing its price to rise. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
For the current quarter, Fortinet is expected to post earnings of $0.22 per share, a change of +15.8% from the prior year quarter. The Zacks consensus estimate has changed by +0.5% over the past 30 days.
The current year earnings consensus estimate of $1.02 indicates a year-over-year change of +27.5%. This estimate has changed by +0.1% over the last 30 days.
For the next fiscal year, the consensus earnings estimate of $1.22 indicates a change of +20.2% from what Fortinet is expected to report a year ago. Over the past month, the estimate has remained unchanged.
With an impressive externally audited balance sheet, our proprietary stock rating tool – the Zacks Ranking – is a more conclusive indicator of a stock’s short-term price performance because it effectively harnesses the power of earnings estimate revisions. The magnitude of the recent change in the consensus estimate, plus three more factors related to earnings estimatesresulted in a Zacks Rank #3 (Hold) for Fortinet.
The chart below shows the evolution of the company’s consensus 12-month EPS estimate:
12 month EPS
Expected revenue growth
Although earnings growth is arguably the most superior indicator of a company’s financial health, nothing as such happens if a company is unable to increase revenue. After all, it is almost impossible for a company to increase its profits for an extended period of time without increasing its revenue. It is therefore important to know the potential revenue growth of a company.
In the case of Fortinet, the consensus sales estimate of $1.03 billion for the current quarter indicates a year-over-year change of +28%. Estimates of $4.38 billion and $5.27 billion for the current and next fiscal year indicate changes of +31% and +20.4%, respectively.
Latest reported results and history of surprises
Fortinet reported revenue of $954.8 million last quarter, representing a year-over-year change of +34.4%. EPS of $0.19 for the same period versus $0.16 a year ago.
Compared to Zacks’ consensus estimate of $883.54 million, reported revenue is a surprise +8.07%. Surprise EPS was +18.99%.
The company has exceeded consensus EPS estimates in each of the past four quarters. The company has exceeded consensus earnings estimates every time during this period.
Without considering the valuation of a stock, no investment decision can be effective. Crucial to predicting a stock’s future price performance is whether its current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects.
While comparing the current values of a company’s valuation multiples, such as the price-to-earnings (P/E) ratio, the price-to-sales (P/S) ratio, and the price-to-cash flow (P/CF) ratio , along with its own historical values help determine whether its stock is fairly valued, overvalued or undervalued, comparing the company against its peers on these metrics gives a good idea of the reasonableness of the stock price .
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to traditional and unconventional valuation metrics to rank stocks from A to F (an A is better than a B; a B is better than a C; and so on), is quite useful in determining whether a stock is overvalued, correctly priced, or temporarily undervalued.
Fortinet is rated D on this front, indicating that it is trading at a premium to its peers. Click here to see the values of some of the rating metrics that led to this rating.
The facts discussed here and plenty of other information about Zacks.com might help determine whether it’s worth paying attention to the market buzz about Fortinet. However, its No. 3 Zacks ranking suggests it could perform in line with the broader market in the near term.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.