Why Fortinet, CrowdStrike, and Palo Alto Networks Stocks Zoomed Higher Today

Wednesday is shaping up to be a good day to own cybersecurity stocks: Important Q4 results from a network security company Fortinet (NASDAQ:FTNT) sent its stock up 3% and supported the stocks of its peers Crowd strike (NASDAQ:CRWD)And Palo Alto Networks (NASDAQ:PANW). Through 11:45 a.m. ET, these two stocks were up 5.8% and 7%, respectively.

By releasing its fourth quarter results on Tuesday after the close, Fortinet exceeded expectations in terms of both revenue and profit. Instead of the (adjusted) profit of $0.43 per share on revenue of $1.41 billion that it was supposed to report, the company earned $0.51 per share on revenue of $1.42 billion.

Fortinet fourth quarter sales and results

TheFly.com counted no fewer than 16 analysts who raised their price targets on Fortinet in response to its report. And yet, was the news from Fortinet really good?

You might be surprised to learn that it wasn't that great. It's true that sales for the quarter grew at a respectable 10% year-over-year rate. But billings – which signal future revenue growth – only rose 8.5%, implying a slowdown could be around the corner.

Non-GAAP profits exceeded expectations and increased by 16%. But profit calculated under generally accepted accounting principles was just $0.40 per share for the quarter – flat year over year. Worst of all, free movement of capital fell 67% to just $165 million.

Most of these figures reflect a significant slowdown in growth compared to Fortinet's performance earlier in the year. Through 2023, Fortinet reported sales growth of 20%, billings growth of 14%, non-GAAP earnings growth of 37%, and GAAP earnings growth of 38%. . (However, to give credit where credit is due, its free cash flow for the year increased by 19%.)

What Fortinet's Profit Rise Means for CrowdStrike and Palo Alto Networks?

So yes, Fortinet “beat its earnings.” And yes, investors in cybersecurity companies CrowdStrike and Palo Alto Networks have reason to breathe a sigh of relief…for now. That being said, as an investor in one of these three stocks (Palo Alto), Fortinet's Q4 performance actually makes me a little nervous. Consider this:

In addition to the slowdown seen in the fourth quarter, Fortinet's forecast for the first quarter – and for all of 2024 – raises concerns. Management expects first-quarter sales to be between $1.3 billion and $1.36 billion. This entire range is below Wall Street consensus expectations of $1.37 billion. Similarly, for the year, Fortinet expects revenue between $5.72 billion and $5.82 billion, but Wall Street wants to see $5.93 billion.

Certainly, in terms of profits, the short term looks a little better. Fortinet's first-quarter forecast for non-GAAP earnings per share of $0.37 to $0.39 implies that the company thinks it could beat Wall Street's forecast of $0.37 per share. But the midpoint of the company's earnings forecast for the year implies that the company may struggle to earn the $1.67 per share that analysts expect to earn – and Fortinet has given no guidance on GAAP profits, nor on free cash flow.

Now expect upcoming earnings reports from Palo Alto Networks (due February 20) and CrowdStrike (due March 5). In each case, Wall Street has high expectations, predicting that Palo Alto will report quarterly earnings growth of 24% in the fourth quarter… and that CrowdStrike will increase earnings by 75%. They are aggressive targets. Even more worrisome is the fact that analysts will want to see both companies express similarly high hopes for 2024. To avoid disappointing investors, Palo Alto must promise to continue growing earnings by 24% for another year. CrowdStrike, for its part, must promise an accelerating growth rate: 92% growth.

With both of these stocks already trading at extremely high multiples to forward earnings – 64.5 for Palo Alto and 81.3 for CrowdStrike – their pricing appears to be perfect. Any missteps on earnings day — whether in the actual results they report or the future earnings they predict — could send one or both stocks tumbling.

Beware the investor.

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Rich Smith holds positions within Palo Alto Networks. The Motley Fool features and recommends the CrowdStrike, Fortinet, and Palo Alto networks. The Mad Motley has a disclosure policy.

Why shares of Fortinet, CrowdStrike and Palo Alto Networks rose today was originally published by The Motley Fool

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