Fortinet's stock gets downgraded as analyst admits bullish call came too early

By Emily Bary

The cybersecurity company's shares are roughy flat since Guggenheim's upgrade almost a year ago

Guggenheim analyst John DiFucci said he and his team were "obviously too early" when they upgraded Fortinet Inc.'s stock almost a year ago.

Since the close of trading on Aug. 4, 2023, the shares are roughly flat as the iShares Expanded Tech-Software Sector ETF IGV has charged about 22% higher. DiFucci is now reversing course on the cybersecurity name.

"We suspect we're still too early today, so we're pulling back our rating and will look for a more opportune time to enter the shares," he wrote, as he cut his rating on Fortinet's stock (FTNT) to neutral from buy and removed his $81 target price.

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DiFucci worries that Fortinet is having a "challenging quarter," partly reflecting soft firewall sales as indicated by some of his recent conversations with channel partners. He wrote that his firewall concerns are "further exacerbated by the entrance of new [stock-keeping units] from Cisco to address the lower end of the firewall market, which has been a traditional Fortinet stronghold."

He further flagged a "soft" environment for information-technology spending that he doesn't see improving much through at least the end of 2024.

That said, he also noted that overall estimates for this quarter and forward ones appear "achievable" barring a worsening of business trends.

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DiFucci is also interested in how an apparent change in strategy will impact Fortinet's business.

"We continue to appreciate [Fortinet's] strategy of providing a security platform with primarily organic solutions integrated as a whole, though we also realize that an important cost to this approach is time," he wrote. "In addition, the recent Laceworks acquisition is a departure from this strategy, which introduces integration risk into operations, especially since prior [Fortinet] acquisitions have largely been technology tuck-ins."

Shares of Fortinet are down fractionally in premarket trading Monday.

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-Emily Bary

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07-29-24 0946ET

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