The Ratings Game: Why Fortinet’s record selloff was overdone and Cloudflare’s stock got ‘way ahead of itself’


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Cybersecurity stocks underperformed the broader market Monday as analysts continued to update outlooks of the volatile sector, resulting in one firm’s simultaneous upgrade of Fortinet Inc. and downgrade of Cloudflare Inc.

shares, which fell as much as 6.5% Monday, closed down 2.5% at $67.79, weighed on the ETFMG Prime Cyber Security exchange-traded fund
which closed up 0.6%, while the S&P 500
rose 0.9%. Meanwhile, Fortinet’s
shares finished up 1.7% at $57.70.

On Friday, Fortinet shares turned in their worst one-day performance ever, dropping 25%, after the company reported that an “unusually large volume of deals” got pushed out of the latest quarter, while executives talked up macroeconomic challenges. Of note, the same thing happened to Cloudflare last earnings season, when it said deals were taking longer to close.

Read: Fortinet’s stock sent to the ‘penalty box,’ while Cloudflare appears to have exited it

In a note titled “All that Glitters Isn’t Growth,” Guggenheim analyst John DiFucci downgraded Cloudflare to sell from neutral and set a $50 price target, because even though he views the company as “what true Cloud should have always been,” he said the stock “has gotten way ahead of itself.”

“We believe the modest [second-quarter] beat will not likely carry over to the second half, where a steep hill of new [annual recurring revenue] needs to be climbed just to meet expectations (informed by guidance) — unless of course the macro backdrop (described as a ‘grind’ by management) significantly improves,” DiFucci said.

Annual recurring revenue, or ARR, is a software-as-a-service metric that shows how much revenue the company can expect based on subscriptions. 

Cloudflare recently reported slightly better-than-expected results and guidance, while Chief Executive Matthew Prince played up the company’s AI inferencing strengths.

Read: Cloudflare earnings, outlook top Wall Street estimates, and stock rallies more than 8%

Then, in a Guggenheim note titled “Taking Advantage of the Digestion Period,” analyst Raymond McDonough, who covers Fortinet, upgraded that stock to a buy and set a $70 price target. Fortinet’s shares hit a record closing high of $80.28 in mid-July.

“While we recognize Fortinet faces several headwinds heading into the second half of the year, we do not believe the company is structurally impaired, nor do we believe its competitive positioning has deteriorated,” McDonough wrote.

“On the contrary, when we first launched coverage of the company in January, we underscored our views that Fortinet is a high-quality technology company with a sustainable moat — and those views have not changed,” he added.

Read: Fortinet leads cybersecurity stocks sharply lower after warning of deal delays

McDonough said the company’s initial high forecast “has now been reset,” and with the recent drop in price, risks to the current outlook have “at least partially been priced in.” The analyst expects growth at Fortinet to re-accelerate into 2024.

Cloudflare’s stock is up 50% year to date, while Fortinet’s stock is up 18%, compared with a 15.9% advance of the HACK index, and a 17.7% gain on the S&P 500.

Also on Monday, shares of Palo Alto Networks Inc.
declined 2%, adding to a 8.1% drop Friday, after analysts at Wedbush removed Palo Alto Networks from their Best Ideas List, which includes such stocks as Apple Inc.
Microsoft Corp.
and Tesla Inc.
Palo Alto Networks shares are up 54.3% on the year.

“We believe near-term upside is limited given some of the fears around growth in the cyber security sector, which is an overhang on the name,” Wedbush said in a note, and maintained its outperform rating on Palo Alto Networks.

Read: Microsoft cybersecurity expansion poses long-term ramifications for Palo Alto Networks, Cloudflare, others

In July, Microsoft gained momentum after the company expanded its cybersecurity offerings, putting pressure on pure-play cybersecurity vendors like Palo Alto Networks and Zscaler Inc.

Meanwhile, shares of Palantir Technologies Inc.
which closed down 1.2% at $17.99, rose 2.5% after hours following in-line earnings and an announced $1 billion buyback program. At Monday’s close, Palantir’s stood at a 180% gain year to date, but shares are down 9.3% on the month.

Read more: Palantir announces $1 billion buyback program, stock rises after earnings

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Alexandra Williams
Alexandra Williams
Alexandra Williams is a writer and editor. Angeles. She writes about politics, art, and culture for LinkDaddy News.

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