NSE5_FMG-7.0 tricks - Fortinet NSE 5 - FortiManager 7.0 Updated: 2023

Cybersecurity pure-play leader Fortinet (FTNT -1.25%) got clobbered again after investors were disappointed with another quarterly financial update. The third quarter of 2023 was solid enough. However, the company's product growth (primarily firewalls for things like data centers and remote branch offices) is facing cyclical decline.

Is it time to buy, or is Fortinet stock now a falling knife too dangerous to try to catch?

Fortinet stepping away from its differentiated product, for now

There were two reasons for Fortinet's most recent stock collapse, which has now erased all gains made in 2023. First, management missed its own guidance for Q3 2023 billings (invoices sent to customers). Billings were $1.49 billion, versus the outlook three months ago for them to be $1.56 billion to $1.62 billion.

And second, at the midpoint of new guidance, billings are expected to close out 2023 down 5% from the $1.7 billion reported in Q4 of 2022.

What's happening? After all, cybersecurity is a booming industry. As more organizations migrate their IT over to the cloud, there is incredible demand for next-gen security that can keep data and apps safe.

Primarily, it's Fortinet's big chunk of business tied to product, again, primarily hardware-based firewalls that monitor traffic for a physical location. Product revenue accounted for 35% of the total in Q3. And unfortunately, sales declined 0.6% year over year. Given a deepening down cycle in data center and cloud infrastructure (many customers are doing belt-tightening this year, and reallocating budgets to AI infrastructure), it's no surprise Fortinet believes this segment will remain in a period of decline through the first half of 2024.

But Fortinet is making a pivot toward a new subscription product (services were the other 65% of revenue in Q3) to make up for the hardware downturn. Specifically, it's the SASE (secure access service edge) offering, which it announced a couple weeks prior to the earnings update that it was expanding, utilizing dozens of Alphabet's Google Cloud data centers to strengthen its "Universal SASE."

Fortinet revealed its SASE subscription already represented 20% of billings in Q3, and the company thinks it can grow this offering quickly in the coming quarters and years given the resilient demand for cloud-based security, despite the firewall hardware pullback.

Is this a buying opportunity?

The billings picture looks ugly, but Fortinet management thinks it can still be a single-digit-percentage revenue-growth business through at least Q2 2024. Beyond that, the top team hopes to be back in a mid- to high-teens percentage growth rate once again. And paired with its highly profitable core business, Fortinet believes it can sustain adjusted operating profit margins north of 25% along the way, which should equate to its prior long-term guidance for free-cash-flow profit margins of over 30%.

Data by YCharts.

Of course, I can understand why an investor might doubt this management confidence, given it just missed its guidance two quarters in a row. However, Fortinet would like to remind everyone it has done an exceptional job of clobbering the market since its initial public offering in 2009. That may count for something.

At any rate, it's now up to the top team at Fortinet to execute on this SASE product bridge while the hardware market stabilizes. I expect more turbulence going forward. However, I'm inclined to believe this is still a great business for those eyeing the potential of the cybersecurity market overall in the decade ahead, not a falling knife (at least not for forever).

Fortinet stock now trades for 35 times trailing-12-month earnings, or just 19 times free cash flow. It could be a reasonable value after the market has doled out some punishment, but tread cautiously.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients have positions in Alphabet and Fortinet. The Motley Fool has positions in and recommends Alphabet and Fortinet. The Motley Fool has a disclosure policy.

Nov 3 (Reuters) - Fortinet (FTNT.O) sank nearly 18% and sparked a selloff in cybersecurity stocks with a dismal forecast that compounded fears of slowing client spending in an uncertain economy.

The current losses, if they hold, were set to wipe out nearly $8 billion from the company's market value.

Rivals Palo Alto (PANW.O), ZScaler (ZS.O) and CrowdStrike (CRWD.O) fell between 0.6% and 2.6%.

Fortinet cut its annual revenue target on Thursday and said it expects current-quarter sales between $1.38 billion and $1.44 billion, below estimates of $1.50 billion, LSEG data showed.

"We thought sentiment reflected an expectation for a miss/ guide down, but the magnitude was even worse than our bogeys," said Raymond James analysts.

Competition in the sector has been intensifying as clients seek companies that serve as a one-stop shop for all cybersecurity needs, weighing on growth of smaller players and boosting sales at the likes of Palo Alto.

Fortinet continues "to see increased deal scrutiny and longer sales cycles, which is constraining near-term results", CFO Keith Jensen said on Thursday.

Growth is also slowing in some parts of the company's business as demand normalizes after two years of rapid gains during the pandemic.

"This was a debacle quarter for Fortinet," Wedbush analysts said. "It's a head scratcher how weak things got at Fortinet."

Overall, eight brokerages downgraded the company and at least 18 analysts cut their price targets, pushing the median to $59, LSEG data showed.

Fortinet shares have risen nearly 18% this year. It currently trades at nearly 33 times its 12-month forward earnings estimates, compared with Palo Alto's 44.6 and CrowdStrike's 54.5.

Our Standards: The Thomson Reuters Trust Principles.

Big cybersecurity pure play Fortinet (FTNT -1.25%) took a beating after its last earnings update in August 2023. After a hot growth streak during the pandemic-fueled cycle of data center upgrades (in support of a big pivot to cloud computing), Fortinet is slowing down. Investors took the opportunity to take some profit in the richly valued stock.

But Fortinet isn't idly sitting by and hoping that its unified network security hardware and software business will rebound. The company has been quietly making a push into a new realm of cybersecurity, and it just announced a new partnership with Alphabet's (GOOGL 1.72%) (GOOG 1.70%) Google Cloud to further its efforts. Is it time to buy the dip in Fortinet stock?

Fortinet's big move into software services

Fortinet has long had a secret weapon in the cybersecurity market. Not only does it design firewalls -- network security devices that monitor network traffic -- but it also designs proprietary chips that power them. It calls these Security Processing Units, or SPUs, a type of CPU customized for security purposes.

This has helped Fortinet crank out best-in-class security hardware, which customers purchase to secure physical locations (everything from a data center to an office building to a retail store), and which gets bundled together and operates with its software services (the recurring subscription-based revenue part of Fortinet).

Data source: Fortinet. YOY = year over year.

The stock fell hard this past summer because its high valuation was paired with a downgrade to management's near-term growth outlook. Expectations for full-year 2023 billings (the value of invoices sent to customers) were reduced by a couple hundred million dollars, to a range of $6.49 billion to $6.59 billion, as some customers have slowed spending and signing new contracts this year. The revised guidance implies Fortinet's overall revenue expansion will sink below the 20% mark.

But not all is lost, as Fortinet still expects to see double-digit percentage growth for the foreseeable future. The new Google Cloud deal illustrates the big opportunities that still lie ahead for the company.

Specifically, Fortinet is expanding its points-of-presence (POPs) for its secure access service edge (SASE, pronounced "sassy") security service, called Fortinet Universal SASE.

What exactly is SASE?

SASE is a type of security architecture first labeled as such by tech researcher Gartner in 2019. SASE refers to the unification of network hardware and security software-as-a-service (SaaS), combining multiple technologies into one converged security solution.

The idea behind SASE is to provide a holistic security service that a company can deploy to all of its operations -- such as an office building, a location remote from a main campus, employees working in the field or from home, a data center supporting a company's private cloud apps, and public cloud services.

Fortinet, along with many other cybersecurity leaders like Palo Alto Networks (PANW -5.42%), was quick to start building out SASE. Fortinet's legacy of best-in-class hardware is a great start in this arena. But to fully meet the definition of SASE, a security service must be cloud-based (located in a data center) and globally distributed. That's where Google Cloud comes in.

Is Fortinet's SASE the real deal, or is it just getting sassy with the competition?

To boost its competitiveness, Fortinet will use Google Cloud's dozens of POPs (small data centers located in strategic markets close to end users) to expand its Universal SASE. Presumably, this will rely heavily on Fortinet's own SPU-powered firewalls, and it could really up the game for Fortinet's SASE service.

This past summer, Gartner named Fortinet a challenger in this realm of next-gen cybersecurity, along with a couple of private start-ups. But big security pure-play Palo Alto Networks was named the only leader in this department. Fortinet together with Google Cloud could narrow that gap.

This deal looks like a win-win. Google Cloud lands a bigger customer in Fortinet for its cloud infrastructure, and Fortinet gets some global computing power for one of its marquee services. I own both Alphabet and Fortinet stock, and I plan to hold both for the long term.

But what of Fortinet's slowdown? Perhaps the buildout of its Universal SASE will help this security leader reignite conversations with existing and potential customers. After all, the cadence of data breaches and cybersecurity incidents isn't abating. Businesses around the world continue to get exposed as being deficient in data security. There's no shortage of demand for services like Fortinet Universal SASE.

But only time will tell if Fortinet's slowdown is a sign of a permanent tapering-off in growth, or just a lull due to weakening economic conditions in 2023. I believe Fortinet is still in good shape, and has a new growth lever to pull on with this upgraded Google Cloud partnership.

Nevertheless, bear in mind that Fortinet stock does still trade for a high premium. As of this writing, the share price values the company at 44 times trailing-12-month earnings, or 29 times trailing-12-month free cash flow. Suffice it to say the market still has high hopes for Fortinet. As with some other premium-priced stocks, consider using a dollar-cost average plan to build a position over time, if you think Fortinet still has years of growth prospects ahead.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients have positions in Alphabet, Fortinet, and Palo Alto Networks. The Motley Fool has positions in and recommends Alphabet, Fortinet, and Palo Alto Networks. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.