Fortinet's Q2 Earnings Disappoint Analysts, Macro Environment Negatively Impacting Business

BMO Capital's Keith Bachman lowered their price target on Fortinet (NASDAQ: FTNT) by 18.2% from $88 to $72 on 2023/08/04. The analyst maintained their Hold rating on the stock.

In a report released on August 3, Fortinet announced its Q2 2023 earnings, which left Bachman feeling disappointed. According to the analyst, the macro environment is negatively impacting Fortinet's core business and is likely to have broader implications for the firewall industry as a whole. Bachman expressed concerns about the company's contracting contract duration, especially given the challenging macro environment.

However, the Q2 2023 results were not all negative for Fortinet. The company reported an earnings per share (EPS) of $0.38, surpassing the Zacks Consensus Estimate of $0.34 and showing a significant increase of 58.3% compared to Q2 2022's $0.24. Revenue for the quarter came in at $1.29 billion, missing the Zacks Consensus Estimate of $1.30 billion but still representing a growth of 25.5% compared to Q2 2022's $1.03 billion. Additionally, Fortinet's gross margin increased by 140 basis points year-over-year to reach 77.9%, while the operating margin improved by 210 basis points to reach 26.9%.

Looking ahead, Fortinet's management provided guidance for Q3 2023 and the full fiscal year 2023. For Q3 2023, the company expects revenues in the range of $1.315 billion to $1.375 billion, a gross margin of 75.5% to 76.5%, an operating margin of 24.5% to 25.5%, and an EPS of $0.35 to $0.37. For the full fiscal year 2023, Fortinet anticipates revenues in the range of $5.35 billion to $5.45 billion, a gross margin of 75.25% to 76.25%, an operating margin of 25.25% to 26.25%, and an EPS of $1.49 to $1.53.

Chairman, CEO & Founder Ken Xie remains optimistic about Fortinet's future prospects. He stated, "As a leading cybersecurity platform and secure networking vendor, we remain well-positioned for strong long-term growth as companies increasingly look to consolidate vendors and point products. We are one of the top market share leaders in both SD-WAN and OT, and we will continue to focus on our key long-term growth markets of Secure Networking, Consolidated Cybersecurity Fabric, Hybrid Cloud Security, and Operational Technology, which have a combined 2023 TAM of $122 billion."

Following Bachman's report, other analysts also updated their ratings and price targets for FTNT on August 4. Baird's Shrenik Kothari lowered their price target by 9.7% to $93 but maintained their Buy rating on the stock. Morgan Stanley's Hamza Fodderwala lowered their price target by 4.8% to $84 and maintained their Strong Buy rating. Wells Fargo's Andrew Nowinski lowered their price target by 5.6% to $90 but also maintained their Strong Buy rating.

Currently, 73.3% of top-rated analysts rate FTNT as a Strong Buy or Buy, while 26.7% see it as a Hold. None of the analysts recommend or strongly recommend selling the stock.

The consensus forecast among analysts is that FTNT's next year will deliver an earnings per share (EPS) of $0.96. If the analysts are correct, this would represent a 22% decrease on a year-over-year basis.

Since the release of Fortinet's latest quarterly report on August 3, the stock price has experienced a decline of 25.1%. However, on a year-over-year basis, the stock is up by 7.9%. During the same period, FTNT's performance has trailed behind the S&P 500, which has seen an 8.8% increase.

BMO Capital analyst Keith Bachman is ranked in the top 5% of Wall Street analysts by WallStreetZen, with an average return of 6.4% and a 59% win rate. They specialize in the Consumer Defensive, Technology, and Consumer Cyclical sectors.

Fortinet, Inc. is a cybersecurity solutions provider that offers a range of integrated and automated products. These include hardware and software licenses for functions such as firewall, intrusion prevention, anti-malware, virtual private network, and web filtering. The company also provides secure switching and wireless networking solutions, centralized network logging and analysis tools, and endpoint protection services. Fortinet serves customers in various industries, including telecommunications, technology, government, financial services, education, retail, manufacturing, and healthcare. The company was founded in 2000 and is headquartered in Sunnyvale, California.

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