Fortinet's Total Equity stayed negative for 2 years in a row, should you be concerned?

KEYPOINTS:

🔑 Caused by high amount of Stocks Repurchases (leading to negative Retained Earnings).

🔑 Investors can take this as a good sign that the management is very long in the company's stock.

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Table of Contents:

1. Fortinet's Shareholders' Equity turned negative (again) in Q4 2023.

2. What caused the Negative Shareholders' Equity value?

   1. What caused the Accumulated Deficit amount?

   2. Why were Fortinet's Retained Earnings negative in the past 6 out of 7 years?

      1. Answer: Fortinet's Share Repurchase Program

3. [Conclusion]: Is it still safe to hold Fortinet's stock as a long-term investor?

   1. It is almost always a good sign whenever a company's management is acquiring their shares from the market.

Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.

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Fortinet's Shareholders' Equity turned negative (again) in Q4 2023.

• Fortinet's 2023 Q4 result revealed their Total Equity amount has reached a negative level once again (after returning to positive levels in Q1, Q2, & Q3 in 2023).
  

  • Read here to learn why negative shareholders' equity could be a redflag for investors.
    

(source: StockAnalysis)

• As a result, Fortinet's Shareholders' Equity has been negative for 2 years in a row now.

(source: StockAnalysis)

• (note): previously, I wrote about what caused Fortinet's Negative Equity amount in Q2 2022 in this article here.

What caused Fortinet's negative Total Equity value?

(source: Fortinet Reports Fourth Quarter and Full Year 2023 Financial Results)

•  When taken a closer look at what caused the Negative Equity amount,

  • it is due to the Accumulated Deficit (aka negative Retained Earnings amount)

  • (workings): Shareholders' Equity of -463.4 = (0.8 + 1,416.4 -18.9 - 1,861.7)

What caused Fortinet's Accumulated Deficit (negative Retained Earnings) amount?

• When looking deeper into what caused the Accumulated Deficit amount

  • it revealed that this is due to their high amount incurred from *Repurchase & retirement of common stock ($1,463.1 mill).

(source: p.74, FORM 10-K, For the year ended December 31, 2023)

Why were Fortinet's Retained Earnings negative in the past 6 out of 7 years?

(source: StockAnalysis)

• Looking at Fortinet's Retained earnings in the past few years,

  • we can see that it was negative in 6 out of the past 7 years
    

• even though throughout the same duration, the company:

  • was in a Net Cash position all along,

(source: StockAnalysis)

• and was getting more profitable.

(source: StockAnalysis)

(source: Stock Analysis)

• Hence, when taking a deeper look into what caused these negative retained earning figures

  • it revealed that it was due to high Repurchase & retirement of common stock amount in these years too.
    

Fortinet's Accumulated Deficit in 2020, 2021 & 2023 were due to the high amount of *Repurchase and retirement of common stocks (source: p.74, FORM 10-K, For the year ended December 31, 2023)

Answer: Fortinet's Share Repurchase Program

• Share repurchase program as stated in Annual report for year ending 2023

(source: p.47 FORM10-K for the year ended 31 Dec 2023)

• in Feb 2023, Fortinet's management extended the share repurchase program by another 1 year (until 29 Feb 2024).

Fortinet seemed to ramp up their Stock Repurchase amount again in Q3 & Q4 2023 since their stock price fell during that period.(source: p.17, Fortinet Q4 2023 Earnings Announcement Presentation)

Fortinet's stock price fell as much as 38% from their ATH levels in 18 July 2023 , making it more attractive to buy their own stocks when prices were lower.

When zoomed out to yearly view in 2022 & 2023,

there appears to be a clear correlation between their

• their stock price movement

• and their Shareholders' Equity value
  

• since those two years, their stock price fell as much as 19% from the all-time high levels.

• and Fortinet had the highest amount of Shares Repurchase figures in the same 2 years too since,

Fortinet had the highest Share Repurchase in 2022 & 2023 since their inception (source: stockanalysis)

[Conclusion]: Is it still safe to hold Fortinet's stock as a long-term investor?

• At this point, I deem Fortinet to still be a fundamentally sound company to be maintained in my portfolio.

• Since, I am still very long in the Cybersecurity Industry as a whole [1]

  • and Fortinet is one of the most fundamentally strong player in the industry.
    

• Furthermore, I can deduce that Fortinet's negative stock holders' equity is not due to their

  • increased debt nor

  • incurred losses

    • both of which are redflags investors should be concerned with.

• On the otherhand, Fortinet's overall Balance sheet is still very strong

  • with close to no gearing (debt) level,

  • healthy & increasing level of total Cash
    

Fortinet's Cash & Cash Equivalents have been steadily increasing since the past decade (source: StockAnalysis)

• and their:

  • profitability has been increasing steadily, with

  • healthy & increasing of Cashflows too.

Fortinet's Free Cash Flow have been steadily increasing since the past decade (source: StockAnalysis)

It is almost always a good sign whenever a company's management is acquiring their shares from the market.

• It signals a high level of confidence from the management's side on the future prospect of their company's stock.
  

Fortinet's shares outstanding has been steadily declining in the past 5 years , which may benefit existing shareholders. (source: ycharts)

• hence for the reasons stated above, Fortinet will maintain as one of the main holdings in my portfolio for the near to long future.
  

• Read Why Investors should favour companies with shrinking Shares Outstanding with Increasing EPS.

Footnotes:

[1]: Statista's Market Insight on Cybersecurity Industry (Worldwide)

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