Fortinet and Cloudflare Stocks Are Sinking. ‘Uncertainty Is Up’ in Cybersecurity.’
Apple
’s
bumper stock-buyback announcement is dominating the tech news, but don’t overlook the trouble in cybersecurity highlighted by
and
Cloudflare
’s
earnings.
In a call to discuss Cloudflare’s results late Thursday, management earnings used the term “uncertain” at least five times, highlighting geopolitical shifts that have changed customers’ buying behavior. “A lot spooks me right now,” said CEO Matthew Prince. “We are in a much more uncertain environment and the signal that we’re seeing is that uncertainty is up.”
Cloudflare’s forecast of sales for the full year was conservative. The security company stuck with an earlier call that sales will be between $1.648 billion and $1.652 billion, a range whose midpoint is a touch below the consensus call of $1.651 among analysts tracked by
FactSet
.
That forecast and Prince’s remarks likely overshadowed the results for the first quarter. The company generated 16 cents in earnings, higher than the 13 cents analysts had expected. Revenue of $378.6 million also came ahead of the $373.1 million anticipated.
The shares fell 18% to $72.78 on Friday afternoon. That put it on pace for its daily largest percentage loss since April 28, 2023, when it fell 21%, according to Dow Jones Market Data.
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Part of the problem is the starting point. The stock had doubled in price over the past year, compared with the
S&P 500’s
24% gain. “NET shares needed a strong print and guide to move up after a 100% rise over the last year,” wrote Needham’s Alex Henderson.
The stock is also one of the most expensive in the security software space. Heading into the earnings, Cloudflare’s enterprise value was 16.5 times the revenue expected for the next 12 months. The average multiple for a group of security providers comparable to Cloudflare that Guggenheim covers is 6.9 times.
Cybersecurity companies have been facing headwinds for a few quarters. Prince said earlier this year that last year’s bigger theme of skittishness among buyers and companies’ hesitance to spend is continuing. Competition from significantly larger and better funded rivals like Amazon Web Services and
Microsoft
’s
Azure is also a risk.
Fortinet, a $49.75 billion cybersecurity company, is also facing challenges. It reported quarterly billings of $1.41 billion for the first quarter in after-hours trading on Thursday. That was below last year’s level and short of Wall Street’s forecast of $1.425 billion.
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Revenue of $1.35 billion for the first quarter was modestly higher than expectations of $1.34 billion. Earnings of 43 cents beat expectations of 38 cents.
Shares were down 8.4% to $59.74 on Friday.
To be sure, the weakness in the stocks may present a buying opportunity. Henderson kept his Buy rating on Cloudflare’s stock, writing that the management has now “de-risked” the shares by being prudent with its guidance.
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He sees the stock hitting $135, implying a 82% gain from current levels.
Wedbush’s Taz Koujalgi kept an Outperform rating on Fortinet while lowering his target for the stock price to $78 from $86. “We still believe the FTNT story will see a growth turnaround over the next six to 12 months, but clearly the company is navigating a choppy environment in the field,” he wrote.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com.
