Fortinet (FTNT) PT Lowered to $78 at Evercore ISI
Evercore ISI analyst Amit Daryanani lowered the price target on Fortinet (NASDAQ: FTNT) to $78.00 (from $105.00) while maintaining a In Line rating.
The analyst comments "FTNT delivered in-line Q2 results, making for an uneventful quarter on the surface. While the FY guide was reiterated, a $50mn mix shift from services to product revenue stood out. At first glance, it seemed explainable and easy for the street to look past. However, a closer look suggests this revision reflects softer performance in next-gen software (non-firewall rev) than previously anticipated. More importantly, the CFO’s commentary on the refresh cycle marked a clear turning point. It effectively dismantled the bull case, which was predicated on the assumption that the firewall refresh cycle would serve as a multi-year growth driver, a view that now appears unsupported. The CFO disclosed that 40%-50% of the refresh cycle is already complete, a significant revision from the previously stated 20% that was made earlier in 1Q, which we learned was inaccurate. Reverse engineering the numbers suggests that non-refresh firewall rev is not growing, further weakening the underlying fundamentals outside of the refresh dynamic. While the size of the refresh opportunity remains unchanged at $400mn - $450mn, the unit count increased from 580k to 650K. This implies the refresh began earlier than initially believed, likely sometime in CY24, though mgmt cited limited visibility between the channel and internal tracking as a factor in the delayed recognition/confusion in the data. Mgmt indicated that the higher value appliances are being refreshed now, leaving the lower value units to make up the remaining 50%, which is expected to occur in CY26. Although mgmt did not formally guide for CY26, they indicated on our call back that investors should expect double-digit product rev growth next year. The dynamics impacting services rev which was up 14.1% y/y, ~60pts and why below consensus, mgmt cited fading COVID-era deferred rev tailwinds, longer upsell cycles, and higher churn on acquired assets than previously anticipated. Inorganic contribution added 2pts to rev and billings growth in 2Q. Bottom line: this print is likely to have ripple effects across the broader cyber space, with questions already emerging around whether the results reflect a sector-wide fundamental issue or something more idiosyncratic to FTNT."