Bank of America says this cybersecurity stock commands a premium valuation

Published Mon, May 8 20237:38 AM EDT

Bank of America is bullish on Fortinet , saying the cybersecurity company's strong fundamentals make it well-positioned to achieve long-term targets. "We believe that in the current uncertain environment, it is more prudent for investors to focus on the basic value proposition of Fortinet and ignore the quarterly noise of backlog trends," analyst Tal Liani wrote in a Monday note. "Fortinet is a leading network security company, with a unique hardware-led approach that provides substantial price advantage over competition and enables it to bundle more services into its platforms." Liani upgraded Fortinent to buy from neutral. He also raised his price target to $75 from $66, which implies a 16.1% rally from where shares closed on Friday. Liani said Fortinet's "impressive execution" led the company to a clean first quarter across the board. Revenues grew 30% year over year, the analyst noted, along with double-digits order growth and 30% service revenue growth. The company also posted its highest seasonal level of operating margins, which was boosted by "strong topline growth, improved gross margins and favorable FX tailwinds," Liani said. "We believe the company will continue to demonstrate a strong price/performance value proposition due to its custom ASIC products. We see this, along with new product introductions, as driving replacement cycles and opening new opportunities in the high-end data center market given its competitive throughput," Liani added. To be sure, Liani noted concerns of backlog drawdowns. "However, trends are solid and we highlight continued strong execution despite a challenged environment, attesting to the high value Fortinet delivers to its customers. While backlog drawdowns remain a reality, the business momentum dwarfs these concerns, and the underlying demand remains strong," said the analyst. Fortinet shares jumped 3.2% Monday prior to the market open. The stock has popped 32.1% in 2023, amid a 21.2% jump over the past 12 months. "The company is also expanding into new areas, and the success of this strategy is evident in its financial results," said Liani, adding that its "strong financial profile commands premium valuation." —CNBC's Michael Bloom contributed to this report.