Fortinet's 74% Surge Since April Is Attracting Attention, but Is It Sustainable?

Since the start of May, Fortinet (NASDAQ: FTNT) has rallied by roughly 74% as its cybersecurity software has been attracting new customers, and momentum has been building for its recurring revenue model. Meanwhile, there are major catalysts in play for the whole cybersecurity industry that give Fortinet meaningful tailwinds.

Cybersecurity's total addressable market is set to surge

Grand View Research projects a healthy 11.9% compound annual growth rate for the cybersecurity industry through 2033 -- but the opportunities ahead suggest the industry could blow past that projection.

In the realm of cybersecurity, the "attack surface" for an organization is simply the sum total of all the points where a hacker might attempt to gain access to its systems and data, from a laptop to a server to an unsuspecting employee falling for a phishing email. And in its first-quarter presentation, Fortinet management pointed to the expansion of attack surfaces as a "strong, long-term secular tailwind." Artificial intelligence (AI) was listed as one of the factors that is increasing the size of the attack surface for its clients.

As companies use artificial intelligence more, they are also creating more points of vulnerability, so they will need to invest more heavily in their cybersecurity. This should bring new customers to Fortinet's offerings, and lead many of its established customers to expand their contracts to more expensive plans.

Image source: Getty Images.

Although hackers can use AI to penetrate businesses, Fortinet has been using AI-driven security tools to keep its customers safe. It's a battle of AI vs. AI, and the company has developed more than 20 AI-driven solutions. It also has more than 500 issued and pending AI patents.

Fortinet also secures AI systems from the data center to the edge. Each new AI data center will increase the need for services of the type that it offers. More than 800 of these data centers are currently under construction worldwide in what is shaping up to be one of the largest infrastructure build-outs in history.

Fortinet's revenue is accelerating

Fortinet isn't the only cybersecurity company in the market, and its stock has been lagging rivals CrowdStrike and Palo Alto Networks for several years. Those two companies had stronger reputations for growth, while Fortinet looked more like a maturing business.

That's why it may come as a surprise to some investors that Fortinet is suddenly leaving those two growth stocks in the dust year to date, but the surge in its share price is backed by fundamentals.

The company has maintained an annualized revenue growth rate of 15.5% over the past three years, but this year, its pace has accelerated. In Q1, revenue increased by 20% year over year to $1.85 billion. More than one-third of its revenue comes from its product segment, which grew by 41%. Fortinet also wrapped up the quarter with $2.09 billion in billings, up 31%, a statistic that offers clear revenue visibility for future quarters.

This revenue acceleration could be the start of something more exciting. Fortinet also told investors in its Q1 press release that it is working with Anthropic, OpenAI, and other AI leaders. Those deals could become more lucrative over time.

Although management's outlook for revenue in the $1.83 billion to $1.93 billion range for Q2 isn't too exciting compared to its Q1 revenue, investors should consider that Fortinet exceeded the high end of the guidance range it gave for the first quarter. Long-term catalysts and past results suggest Fortinet can deliver another beat, which would be a bullish event for the stock.

Fortinet protects AI infrastructure

Do you think hyperscalers will buy more AI chips in the coming quarters or scale back their hardware purchases? While that has been a critical question for investors in chipmakers such as Nvidia and Broadcom for several years now, it has suddenly become a major topic of interest for Fortinet shareholders, too.

Fortinet is one of the many companies that have integrated themselves into AI infrastructure to some degree. Its role is to keep AI data centers, processors, and electrical supplies safe from hackers. As data center companies buy and deploy more AI processors, they will have to pay Fortinet or one of its peers more to protect those resources.

While other cybersecurity companies can also help, Fortinet is currently the only cybersecurity company with custom chips -- application-specific integrated circuits that it calls Security Processing Units -- that improve the speed and cost of its data center security solutions. Furthermore, it is one of Nvidia's strategic partners.

Big tech is expected to spend more than $700 billion on AI infrastructure this year. Nvidia's latest earnings report highlighted an 85% year-over-year revenue jump as its processors remain in hot demand. All of that is good news for Fortinet. It sets the stage for robust growth in the cybersecurity industry, and Fortinet is growing at a faster rate than the industry.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike, Fortinet, and Nvidia. The Motley Fool has a disclosure policy.