Fortinet's (FTNT 1.66%) stock plunged 25% on Aug. 4, after the company posted a mixed second-quarter earnings report. The cybersecurity company's revenue rose 25% year over year to $1.29 billion, narrowly missing analysts' estimates by $10 million, but its adjusted earnings grew 58% to $0.38 per share and cleared the consensus forecast by $0.04.
Fortinet's headline numbers looked healthy, but an unexpected reduction to its full-year revenue forecast rattled the bulls and sparked a broad sell-off across the cybersecurity sector. Does that grim warning suggest it's too late to buy Fortinet?
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What does Fortinet do?
More than two decades ago, Fortinet launched FortiGate, a "next-gen" firewall that provided more network device filtering capabilities than traditional firewalls did. That firewall became the foundation of its "Security Fabric," a comprehensive security platform that provides end-to-end security tools for on-premise, cloud-based, and Internet of Things (IoT) devices through a mix of appliances, on-site software, and cloud services.
Fortinet differentiates itself from its competitors with customized ASIC chips built for its own hardware and FortiOS operating system. It claims these proprietary chips give it a significant advantage against other cybersecurity appliance providers that use off-the-shelf x86 CPUs, programmable chips, and Arm-based chips. It believes the convergence of the cybersecurity, networking, and hybrid cloud markets will drive the market's long-term demand for its services.
Fortinet's growth rates support that bullish long-term outlook. Between 2012 and 2022, its revenue rose at a compound annual growth rate (CAGR) of 24% while its adjusted net income grew at a CAGR of 27%. It currently serves more than 680,000 customers globally, including most of the Fortune 500, so it's often considered a bellwether of the cybersecurity sector. That's why its reduced guidance for the rest of the year caused many other cybersecurity stocks to stumble.
Was Fortinet's outlook that alarming?
As the following table illustrates, Fortinet slightly reduced its revenue and billings estimates for the full year. It blamed that slowdown on the macro headwinds, which forced many companies to rein in the software spending and sign shorter contracts.
|
Metric |
2022 (Actual) |
2023 Outlook (Previous) |
2023 Outlook (Revised) |
|---|---|---|---|
|
Revenue growth |
32% |
23%-24% |
21%-23% |
|
Billings growth |
34% |
21%-22% |
16%-18% |
Data source: Fortinet.
Fortinet also dampened hopes for a quick recovery by predicting that its billings growth rate would remain in the "high teens" thorough the end of 2024. That dim outlook raises some troubling questions regarding its long-term goal of generating $8 billion in revenue and $10 billion in billings by 2025. To hit those targets, it needs to grow its revenue and billings at a CAGR of 22% and 21%, respectively, from 2022 through 2025.
Fortinet didn't reiterate its 2025 targets during its second-quarter conference call. Instead, CFO Keith Jensen said Fortinet might re-evaluate those goals as it enters its "normal planning cycle for 2024" in the second half of 2023.
But on the bright side, Fortinet raised its adjusted gross margin, adjusted operating margin, and adjusted earnings growth estimates for the full year. It still expects its margins to decine year over year as its revenue growth cools off, but it expects its price increases, lower product costs, and cost-cutting measures to cushion that blow.
|
Metric |
2022 (Actual) |
2023 Outlook (Previous) |
2023 Outlook (Revised) |
|---|---|---|---|
|
Adjusted gross margin |
76.3% |
75%-76% |
75.25%-76.25% |
|
Adjusted operating margin |
27.3% |
25%-26% |
25.25%-26.25% |
|
Adjusted EPS growth |
49% |
21%-24% |
25%-29% |
Data source: Fortinet. EPS = earnings per share.
That improved outlook suggests it can still achieve its long-term goal of maintaining an adjusted operating margin of "at least 25%" through 2025. It also indicates it still has plenty of pricing power in the crowded cybersecurity market.
But is it too late to buy Fortinet's stock?
At $57, Fortinet trades at about 38 times this year's earnings per share. That makes it seem cheaper than Palo Alto Networks (PANW 0.67%), which is growing at a similar rate but trades at 48 times forward EPS. CrowdStrike (CRWD 1.52%), which is growing faster than Fortinet and Palo Alto, has a much higher forward multiple of 64.
When I look at Fortinet, I mainly see its resilience during previous economic downturns, its impressive proprietary chips, its stable margins, and its ability to generate consistent profits on the basis of generally accepted accounting principles (GAAP). Its stock might stay in the penalty box until its billings growth accelerates again, but I believe this evergreen cybersecurity company is still a great long-term investment.
Leo Sun has positions in CrowdStrike and Palo Alto Networks. The Motley Fool has positions in and recommends CrowdStrike, Fortinet, and Palo Alto Networks. The Motley Fool has a disclosure policy.
Fortinet's (FTNT 1.66%) 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.
Fortinet Inc.’s warning of “macro uncertainties” was weighing on the cybersecurity sector Friday, though at least one industry name managed to buck the trend.
Fortinet’s FTNT, +1.62% shares were on track for their worst one-day performance on record Friday, last down more than 22%, after the company reported that an “unusually large volume of deals” got pushed out of the latest quarter, while executives talked up macroeconomic challenges.
The commentary, which helped push Fortinet’s shares away from recent record highs, had ripple effects across the sector, as Palo Alto Networks Inc.’s shares PANW, +0.56% dropped 10% Friday, while the ETFMG Prime Cyber Security ETF HACK declined 1%. The S&P 500 SPX was up 0.6%.
JPMorgan analyst Brian Essex, who had an overweight rating on Fortinet shares but lowered his price target to $74 from $88, said the company’s report hit “the reset button” with a disappointing outlook and billings performance.
Fortinet’s results were seen as a downbeat signal for Palo Alto Networks.
“Although Fortinet has somewhat different end market exposure, we also view results as a negative read for Palo Alto Networks which reports in a few weeks, particularly with regard to product growth and contract duration,” Essex said. “We expect Fortinet will be in the penalty box and will remain under pressure following the disappointing results and lower near-term growth outlook.”
Stifel analyst Adam Borg, with a buy rating and $72 price target on Fortinet, said the earnings report offered “a negative read-through for the broader cyber group, especially on top of the confusing signal sent by Palo’s unusual Friday post-close earnings/analyst day on 8/18.”
Given the stock’s run-up on the year, “it’s not surprising to see the breather and we think Fortinet will remain in the [near-term] penalty box as investors debate if this is simply digestion or competition/shifting architectures,” Borg said. “We firmly believe Fortinet’s competitive positioning remains quite strong.”
Balancing out the negative, Cloudflare Inc. shares NET, +5.26% rallied as much as 15% Friday after the company reported slightly better-than-expected results and guidance, and Chief Executive Matthew Prince played up the company’s AI inferencing strengths.
Notably, Cloudflare had claimed a similar problem to Fortinet’s, that deals were taking longer to close, in its earnings report back in April.
UBS analyst Roger Boyd, who has a sell rating on Cloudflare’s stock, called the company’s report “decent,” and said it leads to “a mostly unchanged outlook.”
Boyd said that while a second-quarter stabilization “does mitigate some concerns” that the 2023 outlook was still too high, “we don’t think the AI inference narrative was entirely proven out.”
Guggenheim analyst John Di Fucci, who has a neutral rating on Cloudflare shares, said it “seems that Cloudflare was a crowded short” given the stock’s reaction to results. While suspecting new business may have declined, DiFucci said that second-quarter results were better than those for the company’s first quarter, compared with the Street consensus.
“We have always appreciated the vision and product execution of this company, which we believe is at least partially accounted for in the current stock price,” DiFucci said.
SUNNYVALE, Calif., Aug. 16, 2023 (GLOBE NEWSWIRE) --
John Maddison, Chief Marketing Officer and EVP, Product Strategy at Fortinet
“We’re pleased that our zero-trust approach to securing the expanding edges of today’s networks is being recognized by Forrester. We believe that the critical convergence of networking and security must be everywhere and are proud to be one of the only vendors to lead in firewall, SD-WAN, and Zero Trust Edge reports. For us, this recognition validates our continuing commitment to developing one of the leading single-vendor SASE solutions on the market.”
News Summary
Fortinet® (NASDAQ: FTNT), the global cybersecurity leader driving the convergence of networking and security, today announced that Fortinet has been named a Leader in The Forrester Wave™: Zero Trust Edge Solutions, Q3 2023 report. The 32-criterion evaluation identifies the most significant vendors and evaluates their zero-trust edge (ZTE) solutions. Fortinet tied for the highest score in the strategy category.
Secure Networking with ZTE, Also Known as SASE
Also known as secure access service edge (SASE), a ZTE architecture merges and delivers networking and security functions as a service using a combination of zero-trust network access (ZTNA), secure web gateways, and cloud security gateways.
The Fortinet FortiSASE platform converges cloud-delivered security, including secure web gateway, Universal ZTNA, next-generation dual-mode CASB, Firewall-as-a-Service, and Secure SD-WAN networking. Powered by a single operating system, FortiOS, FortiGuard AI-Powered Intrusion Prevention Security Services, and a unified FortiClient agent, FortiSASE helps Excellerate efficiency and delivers consistent security everywhere. By bringing together all of the components needed to converge networking and security, it protects the hybrid workforce with zero implicit trust and helps organizations reduce complexity and consolidate point products. In the report, Forrester points out that Fortinet “differentiated itself in the market by developing and integrating networking functions such as routing into its remote office firewalls, which eases the rollout of its ZTE solution with a unified management interface.”
The Forrester report also states, “Fortinet balances security and networking with eye-popping value.” The report goes on to state, “One of the most compelling aspects of the Fortinet value proposition is its cost. As with its firewalls, the Fortinet option is priced quite literally an order of magnitude lower than the vendor’s most expensive competitors.” FortiSASE can help organizations securely and seamlessly reduce complexity and maximize their return on investment.
How the Forrester Wave™ Results Are Calculated
The Forrester Wave evaluation is an assessment of the top vendors in the market. For the report, Forrester conducts primary research to develop a list of vendors and narrows the list based on the inclusion criteria. Details of product and strategy are gathered through a questionnaire, demos, briefings, and customer reference surveys and interviews.
The evaluation criteria is based on:
- The strength of the offering based on remote workforce security capabilities; zero-trust principles; network control, management, monitoring, visibility and observability; and integrations
- The strength of the vendors’ strategies, including vision, innovation, roadmap, partner ecosystem, pricing flexibility and transparency, and supporting services and offerings
- The vendors presence in the market based on revenue and installed base
Each of the vendors included in the assessment has:
- At least $75 million in annual revenue attributed exclusively to ZTE technologies
- A ZTNA product in addition to a secure web gateway or cloud security gateway as of May 30, 2023
- At least 30% of revenue must come from outside the vendor’s home region and they must have point of presence in every continent except Antarctica
- A remote site appliance that provides physical WAN connectivity, link load balancing, or routing capabilities
- Complete or partial cloud-based administration across the ZTE components
Fortinet FortiSASE
The Fortinet SASE platform provides secure access and high-performance connectivity to users no matter where they are located. By converging networking and security, FortiSASE delivers enterprise-grade security and provides secure remote access to the web, cloud, and applications anywhere. The cloud-delivered solution helps organizations overcome security gaps and integrates with Fortinet FortiManager for visibility and centralized management across on-premises and remote users.
Additional Resources
- Download the full report: 2023 Forrester Wave™: Zero Trust Edge Solutions
- Learn more about FortiSASE and Fortinet’s ability to deliver single-vendor SASE.
- Download the Fortinet 2023 Zero Trust Report or read the blog post for key takeaways.
- Learn about Fortinet’s free cybersecurity training, which includes broad cyber awareness and product training. As part of the Fortinet Training Advancement Agenda (TAA), the Fortinet Training Institute also provides training and certification through the Network Security Expert (NSE) Certification,Academic Partner, and Education Outreach programs.
- Learn more about FortiGuard Labs threat intelligence and research and Outbreak Alerts, which provide timely steps to mitigate breaking cybersecurity attacks.
- Learn more about Fortinet’s FortiGuard Security Services portfolio.
- Read about how Fortinet customers are securing their organizations.
- Follow Fortinet on Twitter, LinkedIn, Facebook, and Instagram. Subscribe to Fortinet on our blog or YouTube.
About Fortinet
Fortinet (NASDAQ: FTNT) is a driving force in the evolution of cybersecurity and the convergence of networking and security. Our mission is to secure people, devices, and data everywhere, and today we deliver cybersecurity everywhere you need it with the largest integrated portfolio of over 50 enterprise-grade products. Well over half a million customers trust Fortinet's solutions, which are among the most deployed, most patented, and most validated in the industry. The Fortinet Training Institute, one of the largest and broadest training programs in the industry, is dedicated to making cybersecurity training and new career opportunities available to everyone. FortiGuard Labs, Fortinet’s elite threat intelligence and research organization, develops and utilizes leading-edge machine learning and AI technologies to provide customers with timely and consistently top-rated protection and actionable threat intelligence. Learn more at https://www.fortinet.com, the Fortinet Blog, and FortiGuard Labs.
FTNT-O
Copyright © 2023 Fortinet, Inc. All rights reserved. The symbols ® and ™ denote respectively federally registered trademarks and common law trademarks of Fortinet, Inc., its subsidiaries and affiliates. Fortinet’s trademarks include, but are not limited to, the following: Fortinet, the Fortinet logo, FortiGate, FortiOS, FortiGuard, FortiCare, FortiAnalyzer, FortiManager, FortiASIC, FortiClient, FortiCloud, FortiMail, FortiSandbox, FortiADC, FortiAI, FortiAIOps, FortiAntenna, FortiAP, FortiAPCam, FortiAuthenticator, FortiCache, FortiCall, FortiCam, FortiCamera, FortiCarrier, FortiCASB, FortiCentral, FortiConnect, FortiController, FortiConverter, FortiCWP, FortiDB, FortiDDoS, FortiDeceptor, FortiDeploy, FortiDevSec, FortiEdge, FortiEDR, FortiExplorer, FortiExtender, FortiFirewall, FortiFone, FortiGSLB, FortiHypervisor, FortiInsight, FortiIsolator, FortiLAN, FortiLink, FortiMoM, FortiMonitor, FortiNAC, FortiNDR, FortiPenTest, FortiPhish, FortiPlanner, FortiPolicy, FortiPortal, FortiPresence, FortiProxy, FortiRecon, FortiRecorder, FortiSASE, FortiSDNConnector, FortiSIEM, FortiSMS, FortiSOAR, FortiSwitch, FortiTester, FortiToken, FortiTrust, FortiVoice, FortiWAN, FortiWeb, FortiWiFi, FortiWLC, FortiWLM and FortiXDR. Other trademarks belong to their respective owners. Fortinet has not independently Checked statements or certifications herein attributed to third parties and Fortinet does not independently endorse such statements. Notwithstanding anything to the contrary herein, nothing herein constitutes a warranty, guarantee, contract, binding specification or other binding commitment by Fortinet or any indication of intent related to a binding commitment, and performance and other specification information herein may be unique to certain environments.
| Media Contact: | Investor Contact: | Analyst Contact: |
| Susan Daffron Fortinet, Inc. 408-235-7700 pr@fortinet.com |
Peter Salkowski Fortinet, Inc. 408-331-4595 psalkowski@fortinet.com |
Brian Greenberg Fortinet, Inc. 408-235-7700 analystrelations@fortinet.com |
