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Fortinet’s Stock Crashed — Is This Leading Cybersecurity Provider Done For? | #hacking | #cybersecurity | #infosec | #comptia | #pentest | #ransomware

Fortinet‘s (FTNT -1.45%) magnificent 2023 rally that sent shares to new all-time highs is over — at least for now. Following second-quarter 2023 financial updates, the market was mighty displeased with management’s guidance.

Whenever a stock fetches a high premium, investors expect management to under-promise and over-deliver, not the other way around. Is it time to bail on Fortinet?

Normalization, or outright disconnect with reality?

Fortinet reported Q2 2023 revenue of $1.29 billion, up 26% from last year. Within that total, product sales (like firewalls, a security device to manage traffic into and out of a physical location) increased 18% to $473 million, and services (of which 55% are security software subscriptions, or SaaS) grew 30% to $820 million. Earnings per share were $0.33, up 57%, and free cash flow (FCF) was up 54% to $438 million.

But the problem had little to do with last quarter, but a lot with the future. Earlier this year, management had said billings (invoices sent to SaaS customers for payment due) would rise to $1.56 billion to $1.6 billion as Fortinet’s massive product revenue over the last few years starts to translate into more software and service. But Fortinet delivered a real shock when it said those billings ended up being just $1.54 billion, below guidance.

Worse yet, full-year 2023 revenue guidance was lowered as much as $75 million less than previously expected to a range of $5.35 billion to $5.45 billion. The services segment is partly to blame as sales from that segment have apparently been delayed by some customers. However, it also seems that product inventory is in need of being right-sized too.

For investors who follow the semiconductor and computing hardware industries, this likely sounds familiar. There are too many of some data center components on hand at the moment, and the current boom of generative AI servers (mostly Nvidia chips powering services like ChatGPT) have also led a lot of cloud and service providers to rethink and retool their designs. Perhaps this is also ripping into Fortinet’s downward revision. Additionally, some retail customers are coping with sluggish consumer spending, and thus are also adjusting their spend on cybersecurity to manage their own flow of cash.

For Wall Street, the big question is now: Is Fortinet simply going through a growth normalization phase after booming financials the last two years, or is management’s execution off? The stock price tanking 25% the day following earnings seems to imply bets are on the latter.

Don’t get antsy with the sell trigger

The good news is that, as of right now, Fortinet is not altering its 2025 financial targets: $10 billion in annual billings, $8 billion in annual revenue, operating profit margins of at least 25%, and FCF margins of mid- to high-30%.  

In another sign of strength, management also increased its share repurchase authorization by another $500 million, leaving $2 billion available for buybacks (or 4% of the new post-stock-crash market cap). That sounds to me like confidence that management still sees its own stock as a good investment.  

I’ve owned shares of Fortinet for nearly five years, and have logged a more than 200% return on my initial investment. I’m not selling, but this situation should be monitored. It sounds like this slowdown in billings should be complete by the end of 2023, and I don’t see a reason to seriously doubt Fortinet’s long-term health.  

After the crash, Fortinet stock trades for 43 times trailing-12-month earnings, or 23 times trailing-12-month free cash flow. If you think profitable growth will continue at a mid-teens percentage clip, this could be an opportunity to nibble.

Nicholas Rossolillo and his clients have positions in Fortinet and Nvidia. The Motley Fool has positions in and recommends Fortinet and Nvidia. The Motley Fool has a disclosure policy.


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