Top Cybersecurity Stocks Take A Hit After Fortinet Reports Slowdown

Palo Alto Networks, CrowdStrike and Zscaler were among the cybersecurity vendors that saw stock price drops after Fortinet cut its revenue guidance Thursday.

Increased uncertainty took hold among investors Friday about the outlook for the cybersecurity market, sending share prices downward for some of the largest publicly traded companies in network and endpoint security.

The stock price drop for top cybersecurity companies was touched off by the latest quarterly financial report from network security vendor Fortinet, which fell short of revenue expectations and included a cut in guidance, as well.

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On Friday, Fortinet’s stock price ended the day at $56.77 a share — a 25-percent plunge from its closing price on Thursday. That represented Fortinet’s largest single-day stock price drop to date, according to a review of historical stock price data available in Google Finance.

Rival vendor Palo Alto Networks — which won’t report its latest quarterly results for another two weeks — was also hit hard. The top-valued cybersecurity vendor saw its stock price drop 8 percent from its Thursday close, ending at $218.32 a share on Friday.

Other impacted cybersecurity firms included competitors with Fortinet in the secure access service edge (SASE) market such as Check Point Software Technologies (whose shares fell 3.6 percent to $127.18) and Zscaler (which dropped 3 percent to $146.16).

But even security vendors that don’t compete in segments such as network firewalls and SASE were affected, with CrowdStrike’s stock price slipping 4.5 percent, to $150.49 a share. The Nasdaq Composite closed 0.36 percent lower on Friday.

During Fortinet’s call with analysts Thursday, CFO Keith Jensen reported that the vendor’s quarterly revenue was affected as an “unusually large volume of deals that we expected to close in June instead pushed to future periods.”

Fortinet reported $1.29 billion in revenue for the second quarter, ended June 30, just below the consensus estimate from Wall Street analysts for the quarter. The network security vendor also slightly reduced its full-year 2023 revenue guidance to a range of $5.35 billion and $5.45 billion.

There were also indicators that formerly hot growth areas, such as SD-WAN, have been cooling off for Fortinet.

For instance, Fortinet Co-Founder and CEO Ken Xie cited the impact of “increased digestion” by customers during the quarter — suggesting that surging product growth over the past two years has led some customers to slow down their purchasing in SD-WAN of late.

The Fortinet results suggest year-over-year percentage growth in the firewall market “could be slowing to mid-high single digit,” wrote Shaul Eyal, managing director at Cowen, in a note to investors Friday.

Meanwhile, revenue from the SD-WAN and SASE product categories is “insufficient to sustain historical high growth rates,” Eyal wrote.

Not As Bad As It Seems?

However, some Wall Street analysts questioned whether other cybersecurity vendors are, in fact, dealing with similarly slowing conditions.

Fortinet’s report “could be viewed as a cautionary flag” for the upcoming Palo Alto Networks results — scheduled for Aug. 18, KeyBanc analysts wrote in a note to investors Friday.

At the same time, feedback from a second-quarter survey of resellers, results from security vendors such as Tenable and Qualys, and “early positive” checks for Palo Alto Networks’ latest quarter “suggest security overall may be faring better than [Fortinet’s] results may indicate,” the analysts wrote.

At Dallas-based solution provider White Rock Cybersecurity, CEO James Range said customer demand has largely remained strong for security solutions, with only a slight change in customer behavior around closing deals.

“A lot of the stuff we’re selling, it’s mission-critical. It’s got to happen,” Range told CRN.

Amid the current economic environment, final deal approval must now sometimes come from higher-level executives — such as a vice president or CFO — which “can gum up the works a little bit,” he said. But on the whole, “our business really hasn’t slowed.”

‘Large New Market’

During Fortinet’s quarterly call, executives also pointed to a number of positive signs in the business and suggested that the longer-term opportunity remains strong.

For its SASE platform, FortiSASE, Fortinet closed its largest deal to date during the second quarter, with a major bank as the customer, Jensen noted.

On the whole in SASE — which combines cybersecurity and networking technologies to secure distributed workforces — “we see our single-vendor SASE solution opening a large new market, and one where our sizable SD-WAN install base can be leveraged as a significant market access point,” he said.