Fortinet, Inc.

This is The Conviction Play. Fortinet, network security. Number six in our Exceptional Company Series, the businesses our framework grades exceptional.

Fortinet sells network security, the firewalls that sit between an organisation's network and the internet, and the threat intelligence those firewalls need in order to be worth anything. The appliance is bought once. The security subscription attached to it renews every year, because a firewall running last year's threat data is decoration rather than protection. Earnings have compounded at 37.6% for twelve years and rose in every single year-on-year comparison, with no drawdown in the record at all, the cleanest earnings curve of any company in this series.

The largest independent maker of network firewalls by units shipped, sold with annual subscriptions to the threat intelligence and security services that keep them effective.

Why the economics are exceptional. The box is bought once; the protection is rented. A firewall is only as good as its knowledge of what it is defending against, and that knowledge goes stale in weeks. So the hardware sale opens a subscription that has to be renewed for the equipment to keep doing its job, not as a maintenance contract a customer may decide to skip, but as the thing they were buying.

The silicon is the cost advantage. Fortinet designs its own processors for the traffic-inspection work rather than running it on general-purpose chips, which is why it can offer throughput at a price and power draw its competitors have to discount to match.

The record has no bad year in it. Earnings rose in all forty-six year-on-year comparisons across twelve years, and the worst fall in trailing earnings over that period was zero. No other company assessed here has that.

The honest risk. Firewalls are replaced on cycles, and the industry-wide refresh that followed the pandemic pulled demand forward and then left a gap, growth in this business is lumpier than the smoothed twelve-year curve makes it look. It also competes with far larger firms, and with cloud providers who would rather sell the security with the compute.

Two numbers to take away. Over 12 years, earnings per share compounded at 37.6% a year. The worst fall in earnings was 0.0%.

The written profile of Fortinet is on the site, and it goes further than this: the twelve-year earnings record as a chart, the figures behind every claim you have just heard, and the sources for all of them. It is free, with no email address and no paywall.

The Exceptional Company Series also covers Intuitive Surgical, Microsoft, Netflix and three more. Everything we publish is at the conviction play dot com, and the recordings are collected there under Listen.

A note before we finish. This episode is narrated by a synthetic voice, not by the author. Now the important part. This is an assessment of business quality, and it is not a buy signal. It is not a valuation, not a price target, and not a recommendation to buy or sell anything. Exceptional can also be expensive. A company in this series can pass every test we set and still lose you money for years, if you buy it at the wrong price. ResMed fell 51 per cent from its high, spent more than five years below that price and has still not regained it, and its earnings rose the whole way through. The Conviction Play publishes general commentary for information only. It is not investment advice and it is not a personal recommendation. Capital is at risk, and the value of investments can fall as well as rise. This assessment reflects what was known on the date of recording, and nothing in it updates itself.

That was Fortinet, number six in the Exceptional Company Series, from The Conviction Play. Thank you for listening.