Cybersecurity is a big business and is getting bigger every day. Attacks are growing at an alarming double-digit pace and will accelerate in 2024. The rise of AI will accelerate growth in 2025 and increase the risks as black hats get smarter and stronger. That means sustained demand increases for products from leading cybersecurity firms like Fortinet (NASDAQ: FTNT) and Datadog (NASDAQ: DDOG).
Fortinet: Protecting Networks From Cyber Attacks
Fortinet provides various cybersecurity products and services, from firewalls and other network security solutions to threat detection, response, and remediation. Its business is growing in 2024, sustaining double-digit growth and accelerating sequentially. Results have been outperforming analysts' consensus figures, including guidance, which is rising. The company increased its guidance for the year at the end of Q3, suggesting the strength will continue into 2025. The forecast for 2025 is for revenue to grow by 12% and for the margin to widen.
Margin and cash flow are central to Fortinet’s appeal. The company’s growing, positive cash flow business allowed for substantial balance sheet improvement over the last year. The company’s liabilities are up but offset by increased cash, other assets and falling deficits, which drive value for investors. Shareholder equity inverted from negative to positive in the quarter and will likely grow in calendar 2025.
Cash flow and balance sheet health allow for robust share repurchases. The company reduced the count by nearly 2.5% in Q3, and the board increased the authorization. The new authorization doubled the remaining to $2 billion, or about 2.6% of the market cap, with shares near $95.
The consensus target continues to lag FTNTs' price action, but the overwhelmingly positive analysts' response to the Q3 release suggests it will continue to trend higher. MarketBeat tracks several upgrades and numerous price target increases, with sentiment firming to a Moderate Buy and the price target up 1000 basis points in 30 days. Consensus implies a substantial decline in the price action, but the fresh targets, which are all in the high-end range, suggest that this market will move above $100 soon.
Datadog’s Cloud-based Security and Services
Datadog is more than a cybersecurity company. Its unified platform provides cloud-based monitoring along with a suite of other options. It has emerged as a go-to source for small and medium-sized businesses shifting to the cloud for simple, scalable solutions that provide utility and value.
Results in 2024 include sustained revenue growth in the mid-20% with outperformance on the top and bottom lines and improving guidance. Strength is being driven by adoption by larger clients, which is up nearly 12% for Q3. Other drivers of growth include partnerships like with Oracle. Datadog is generally available for Oracle Cloud Infrastructure. This is significant because Oracle is the leading global database provider and is integrated with all three major hyperscalers: Microsoft, Amazon, and Google.
Cash flow and balance sheet improvements will help drive the stock price in 2025. The company doesn’t pay dividends or repurchase shares but may soon commence. The positive cash flow business allowed it to grow its cash balance, reduce its debt to nearly zero, and grow equity by 30% in the last year. Total liability is less than 1X equity, leaving the company in a solid position to continue scaling its business.
The analysts' response to Datadog's results is similar to Fortinet's with upgrades and price target increases. The difference is that Datadog was already pegged at Moderate Buy, and its price target implies a 15% upside from critical resistance levels. The market will likely exceed the consensus because the positive trend and the freshest targets lead to the high-end range, another 1000 basis points higher.
