FTNT position feedback
Hey everybody,
we're a couple of students that started investing as a group, and in order to get some outside feedback on our trades, we decided to put them up here and hopefully have you guys scrutinize our motives behind those trades.
Our first position we acquired: FTNT. After the big plunge FTNT took after the missed earnings, we initially wanted to play the stock via writing out put options with strike 22 due on November 16th. But due to the short rally it put up after the FIRE earnings, and since we didn't know yet if the reasons behind the FIRE rally were industry or firm specific, we decided to just go long on equity instead and keep this one rather long term (up to 6-8 months, hopefully less). Anyways, to sum it up here are our trade reasons:
1) Even though analysts were disappointed as the forecasts were not met, FTNT still has strong fundamentals:
Revenue (ttm): 503.34M Revenue Per Share (ttm): 3.21 Qtrly Revenue Growth (yoy): 17.00% Gross Profit (ttm): 319.98M EBITDA (ttm)6: 103.30M
Total Cash (mrq): 374.65M Total Debt (mrq): 0.00 Total Debt/Equity (mrq): N/A
Revenues of $136.3 million, up 17% year over year Billings of $145.0 million, up 22% year over year
2) After the Q3 earnings call and the following 18.3% intraday drop, as well as the sluggish performance the following days, we found the stock to be trading at a discount, with strong sentiments after missing the estimates affecting the stock price to an extend more than would have been reasonable. Based on the perceived (risk) arbitrage, we decided to go for it on the spot. We had laid an eye on FTNT beforehand already, so the plunge came in quite handy for us (taken into consideration the motives behind the decrease).
3) Stock upgrade of FTNT after the plunge. E.g., Wunderlich upgraded the company to Buy as shares crumble following in-line Q3 results and soft Q4 guidance. Needham is also staying positive, touting Fortinet's growth potential and broad UTM product line, for which an OS upgrade and second-gen ASIC were announced yesterday.
4) FTNTs technology giving it exposure to the strong growth segments of the cyber security industry: The company is a market leader in unified threat management (UTM). UTM is the evolution of the traditional firewall into an all-inclusive security product able to perform multiple security functions within one single appliance. The market is the fastest growing network security segment and Fortinet is market leader with 19.6% world market share.
5) Technical analysis signaled a buy: Trade was made on bottom of bollinger band, after significant drop from $24,5 level to $19,5 approximately. Stochastics indicated highly oversold condition, while the price fell perfectly on the 23,6 fibonacci level (seemed to hold as support point) - swing high from July, and swing low from September were used.
Caveats:
1) Quite simply: everything mentioned in the earnings call, e.g. lower revenues, etc.
2) lower demand from Asia in particular
So what do we expect in terms of price development?
We took a weighted average of the pricing of the big investment houses and emphasized the low end of the price spectrum.
The price estimates were as follows:
Institute Valuation Jefferies 26,00 € Deutsche Bank 30,00 € Wunderlich 28,00 € RBC Capital 27,00 € Northland Securities 31,00 € Stephens 35,00 € Normura 28,00 € FBN Securities 26,00 € Merrill Lynch 30,00 €
According to the weighted average, we have a price estimate of 27,24$.
We would highly appreciate feedback on our motivation to purchase FTNT - don't hold back in terms of criticism, but please always provide reasons for your opinion. We want to learn from this criticism and keep an open mind.
Greets
YoungMonkeys
