Lacking a Negative Catalyst in the Near Term; Upgrading to EW

Research evidence excerpt

Lacking a Negative Catalyst in the Near Term; Upgrading to EW

IdeaMconstructive longer term.

Why is that not built into valuation? FTNT has outperformed over the last several

months on the back of a better-than-expected Q1 print (see Exhibit 1), as investors

have increasingly appreciated the improving firewall demand environment. While we

acknowledge that shares are no longer inexpensive (trading at significant premium

to hardware / networking / software comps), we believe the near-term setup has

improved further following Q1, with potential for continued hardware demand pull-

forward into Q2 as customers navigate higher component costs. We tactically still

believe there is more downside over a 12 month period, hence the PT that still

remains below current valuation. However, with near-term catalysts being more

positive than negative, we step away from our UW, as we could see a similar

valuation pattern emerge as we saw in the 2021 cycle around supply chain

disruption pull forward. We raise our PT to $133 based on 32x our Base Case CY27e

FCF of $2,916M, vs. prior $80 (19x Base Case CY27e FCF of $2,877M). Our Bull Case

moves to $203 (from $120), assuming 45x a bull case FCF, assuming hardware

growth rate can sustain ~20%. Our bear case moves to $90 (from $60), assuming

25x a bear case FCF, assuming growth moves back to single digits after hardware

pullforward from memory purchases. The biggest risks to our Equal-weight rating

would be a faster-than-expected acceleration in subscription attach, stronger

adoption of Unified SASE and SecOps, as well as a more durable firewall refresh

cycle than currently anticipated.

Previewing Q2 – Strong Execution Continues, Though Waiting for More

Meaningful Software Attach Acceleration. Our Q2 checks for FTNT remained