Fortinet Shares Plunge on Disappointing Q3 Results and Weak Outlook
Shares of cybersecurity firm Fortinet (FTNT) took a major hit on Friday following the release of its third-quarter results. The company’s stock plummeted as investors reacted to a disappointing 2024 outlook, which was mainly due to slowing growth in the market for network firewall appliances.
On the stock market, Fortinet’s stock experienced a drastic decline of 12.4%, closing at $50.48. Similar trends were seen in Palo Alto Networks (PANW) stock as well, with a decrease of 2.7% to $243.53. However, Check Point Software Technologies (CHKP) managed to edge up slightly, closing at $136.92.
Fortinet’s rival, Palo Alto Networks, is set to report its earnings on November 15th, leaving investors interested in seeing how it will fare in light of Fortinet’s disappointing performance.
Despite the challenges faced by companies in the network firewall market, Palo Alto Networks has surprisingly seen its stock rise by 79% in 2023. The company has managed to expand its reach through strategic acquisitions that focus on cloud-based services.
The demand for network firewall appliances, which are used to block unauthorized traffic and check web applications for malware, has decreased due to a major shift towards cybersecurity services delivered via remote cloud computing platforms. This transition has impacted the growth of companies like Fortinet.
Fortinet reported third-quarter earnings per share (EPS) of 41 cents, marking a 24% increase from the previous year. This figure exceeded expectations for an adjusted profit of 36 cents. However, revenue came in at $1.334 billion, falling short of estimates of $1.35 billion.
TD Cowen analyst Shaul Eyal commented on the report, stating that “For the first time since FTNT went public, revenue in its appliances business contracted on a year-over-year basis. The slowdown was broad-based across its two major regions as the networking firewall market has entered a cyclical downswing.”
Another disappointing factor came in the form of billings, a metric used to measure sales growth. Fortinet reported billings of $1.49 billion, only a 6% increase compared to the previous year, missing estimates of 12% growth. Additionally, the company anticipates a 5% year-over-year decline in billings for the fourth quarter, with double-digit growth not expected to return until the second half of 2024.
Wells Fargo analyst Andrew Nowinski expressed concern about Fortinet’s future growth, saying that “More importantly, management guided for billings to decline 5% year over year in Q4. They do not expect growth to return to double digits until the back half of 2024.”
To combat these challenges, Fortinet’s management revealed plans to shift its focus towards Secure Access Service Edge (SASE). This strategic move aims to support remote workers and branch offices by offering advanced security tools. Companies like Zscaler and Palo Alto Networks also offer SASE products, which are cloud-based services that replace less secure virtual public networks (VPNs).
Check Point Software reported earnings of $2.07 per share in the third quarter, a 17% increase from the previous year. However, revenue only rose by 3% to $596.3 million. The company’s billings of $530.9 million experienced a 5% decline from the previous year, missing estimates for 10% growth.
While Fortinet faces significant challenges, Palo Alto Networks’ upcoming earnings report on November 15th could provide some insight into the current state of the network firewall market. Analysts are estimating a 40% growth in profit to $1.16 per share for Palo Alto Networks, which could impact the company’s stock performance.
In light of Fortinet’s recent underperformance, William Blair analyst Jonathan Ho downgraded FTNT stock to market perform. Ho emphasized the need for investors to be patient as Fortinet undergoes its transition from a hardware to a software-as-a-service (SaaS) company, stating, “We see 2024 as a transition year when the company will have to go through the realignment process while still preserving 25% or better operating margins.”
As investors await Palo Networks’ earnings report, market observers are paying close attention to the evolving dynamics of the cybersecurity industry, particularly in relation to the shift towards cloud-based services, the impact of the pandemic on remote work, and the growing importance of SASE solutions.
Disclaimer: The information provided in this article does not constitute investment advice. The content is intended for informational purposes only and should not be relied upon as the basis for making investment decisions.