Barclays Goes Neutral On Fortinet In 'Tougher' Firewall Market

Fortinet Inc FTNT’s had a strong run, rising 57.3 percent over the last two years and continuing upward.

But Barclays thinks it’s about to lose steam. 

The Rating

Barclays analyst Saket Kalia downgraded Fortinet from Overweight to Equal Weight and raised the price target from $45 to $48.

The Thesis

Kalia anticipates tougher competition in the firewall market as industrywide revenue growth slows to mid-single digits. (See the analyst's track record here.) 

Firewall is the majority of Fortinet’s business, and it's supplemented by a growing virtual segment, the analyst said. 

Fortinet is at a disadvantage to peers like Palo Alto Networks Inc PANW due to market share gains, a refresh cycle and optionality, Kalia said. 

The sales challenge is seen to be compounded by difficulty in underwriting longer-term numbers. Fortinet posted two earnings misses in the last two years, and it’s udnergoing a period of margin expansion that's historically correlated with stunted growth.

Notably, these setbacks could be offset by an inexpensive multiple and potential shareholder activism, Kalia said. 

“We want to be clear in saying FTNT is not an expensive stock — so we can be wrong if more consistent results lead to multiple re-rating,” he said. “There is also at least one activist that owns the stock in size — if activists unlock value through changes, numbers could go up and cause the stock to outperform.”

Price Action

Fortinet was trading down 1.64 percent at $44.26 early in Tuesday's session. 

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