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Cybersecurity Stocks & ETFs Fall on Fortinet’s View Cut


Shares of almost every anti-hacking company took a hit yesterday after Fortinet Inc. FTNT lowered its third-quarter 2016 revenue and earnings guidance, raising investors’ concerns over increasing price competition across the industry.

Revised Q3 Guidance

Fortinet lowered its total revenue guidance range to $343 million – $348 million from the previously announced guidance range of $372 million to $376 million.

Total revenue for the quarter is now estimated to be between $311 million and $316 million, down from its earlier guidance range of $319 million to $324 million. The updated revenue outlook is also lower than the Zacks Consensus Estimate of $322.2 million.

Non-GAAP earnings per share are projected to be in a band of 15–16 cents compared with the previous guidance of 17 cents to 18 cents.

Following the announcement, shares of the cybersecurity company lost over 10% of its value in yesterday’s trading session.

The company cited a longer sales cycle and weakness in North America as the major reasons for outlook cut. It should be noted that challenges highlighted by the company are similar to the ones that surfaced during the second quarter.

The company is witnessing slower sales completion in the enterprise and service provider markets. Ken Xie, Fortinet’s Chief Executive Officer (CEO) stated that "Enterprises are becoming more strategic with their purchasing decisions and buying with less urgency than last year”, which is resulting in lengthening of deal cycles.

Fortinet also blamed poor sales execution issues in North America for the downbeat guidance resulting from the newness of its sales organization in the region. Apart from this, it cited macro-economic issues in Latin America and the U.K. for the dismal outlook.

Cybersecurity Stocks & ETFs Bear the Brunt

The guidance cut by Fortinet heightened investors’ worries over increasing price competition in the cybersecurity space, which resulted in almost every cybersecurity stock and ETF closing in red yesterday.

ETFs like PureFunds ISE Cyber Security ETF HACK and First Trust NASDAQ Cybersecurity ETF CIBR fell approximately 0.9% and 0.7%, respectively. Fortinet’s rivals including CyberArk Software CYBR, FireEye FEYE, Proofpoint PFPT and Palo Alto Networks PANW lost approximately 3.7%, 1.6%, 2.1% and 0.8%, respectively of their value.

Computer and Technology Sector Price Index

Computer and Technology Sector Price Index

Company Specific Challenges

We believe that yesterday’s trade in the cybersecurity space was mostly panic driven as the challenges raised by Fortinet are company specific and are unlikely to impact the industry.

We note that cloud-based security solution provider Barracuda Networks Inc. CUDA posted strong second-quarter fiscal 2017 results on Tuesday. The company’s top and bottom line numbers not only surpassed the respective Zacks Consensus Estimate but also recorded robust year-over-year improvement. Had the challenges affected the industry, Barracuda’s results would not have been encouraging.

Furthermore, the co-founder of TheStreet Inc., Jim Cramer in a recent article pointed that no such issues were highlighted during his last week interview with executives of Proofpoint and Palo Alto Networks. Rather, both companies were encouraged by strong third quarter businesses. Jim Cramer in his blog stated that “I don't think either Proofpoint or Palo Alto is making statements that they can't back up. Just the opposite; these are conservative companies.”

This justifies our view that Fortinet faces company specific issues.

Our Take

We believe that the demand for cybersecurity solutions will continue to grow over the long term. Note that the financial well-being, brand image and reputation of enterprises and governments are always exposed to the risk of cyber threats. Consequently, cyber security has become a mission-critical, high-profile requirement.

With rapid technological advancement, organizations are increasingly adopting the “bring your own device” (BYOD) policy to enhance employee productivity with anytime/anywhere access. This trend, in turn, calls for stricter data security measures.

Moreover, various independent research firms forecast strong demand ahead. According to a Markets and Markets report, worldwide cyber security spending will reach $101 billion in 2018 and $170 billion by 2020. Gartner had earlier revealed that IT security spending peaked to $75 billion in 2015. This signifies a huge growth opportunity in the cybersecurity space.

Currently, Fortinet carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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