Fortinet shares plunged 22% on Thursday even though the company raised its full-year forecast for the third time this year. Investors focused on slowing service revenue growth and a small cut to the service revenue forecast.
Fortinet plummeted 22% as of 2:30 p.m. ET Thursday, taking the stock to its lowest level in nearly five months. The drop came after the cybersecurity company raised its full-year forecast for the third time this year.
Strong quarter, weak spot in services
Fortinet sells network security products, notably its FortiGate firewalls, and then charges recurring fees for services and subscriptions. Product demand was solid: product revenue jumped 37% year over year in the third quarter, while total revenue climbed 20%.
Billings, however, rose 29% to $2.3 billion.
The market fixed on services. They made up over 65% of Fortinet's revenue last year, yet service revenue grew just 13% in Q3. Management also trimmed its full-year service revenue forecast by under 1% at the midpoint.
Growth cooled from Q2
Growth also slowed from the prior quarter. In Q2, revenue grew 26%, product revenue 52%, and billings 33%.
The shares had climbed 120% this year before the earnings report stalled the rally. The Motley Fool's author wrote that investors may read the service guidance cut as a sign that enterprise spending, or customers moving onto Fortinet's platform, could slow next year. The selloff also pulled other cybersecurity stocks down.
What management still expects
Management expects billings to grow about 28% this year and revenue about 20%. Fortinet also lifted its full-year earnings forecast and boosted its buyback program by $1.2 billion.
The next few quarters come down to service revenue growth, according to the source. If it accelerates again, the drop could look like a blip.
Source: The Motley Fool
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