Fortinet downgraded at Raymond James: 'Firewall supercycle call is too early'

Investing.com -- Raymond James downgraded Fortinet (NASDAQ: FTNT) to Market Perform from Outperform in a note Tuesday, citing concerns that expectations for a "firewall supercycle" in network security may be premature.

The downgrade comes after Fortinet’s stock surged nearly 70% following a positive turn in billings growth since 2Q24.

According to Raymond (NS:RYMD) James, while Fortinet’s recent performance has sparked optimism about a reacceleration in growth, the anticipation of a supercycle may be overestimated.

"Billings growth (key metric) has moved from 30%+ growth to negative over the past few years as the biggest boom/bust cycle in company history unfolded. This metric moved back to flat/positive in 2Q24 and grew mid-single digits in 3Q24," analysts noted.

Despite investor excitement, the firm’s conversations with key distributors and resellers indicate that significant pipeline growth and stocking have not yet materialized.

Raymond James also pointed to challenges in Fortinet’s non-firewall products, particularly in the Secure Access Service Edge (SASE) market.

The note highlighted that Fortinet’s growth in SASE, a critical next-generation architecture, lags behind the broader market.

Additionally, the departure of John Maddison, Fortinet’s CMO and EVP of Products, is said to raise further concerns about the company’s ability to gain share in this evolving market segment.

Lastly, valuation concerns contributed to the downgrade.

"FTNT is trading at multi-year highs on an absolute basis and is north of 30x FCF at present, or five turns above its 3-year average," Raymond James analysts explained.

With the stock already at a premium relative to its historical valuation and the broader software index (IGV), the firm sees limited room for further multiple expansion.

Raymond James plans to monitor the situation but believes the anticipated firewall supercycle is likely at least a year away.

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