Fortinet's stock sent to the 'penalty box,' while Cloudflare appears to have exited it

By Wallace Witkowski

Fortinet shares sink toward their worst day on record, dragging Palo Alto Networks shares down as well

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) 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) 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) 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," 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.

-Wallace Witkowski

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08-04-23 1316ET

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