Why Fortinet, CrowdStrike, and Palo Alto Networks Stocks Rode High Today

Wednesday looks promising for cybersecurity stocks: Fortinet (NASDAQ: FTNT) rose 3% after reporting strong fourth-quarter profits, as did CrowdStrike (NASDAQ: CRWD) and Palo Alto Networks (NASDAQ: PANW). Both stocks rose 5.8% and 7% by 11:45 a.m. ET.

Fortinet surpassed top and bottom line estimates in its fourth-quarter earnings Tuesday after the close. Instead of $0.43 per share (adjusted) on $1.41 billion in revenue, the business made $0.51 per share on $1.42 billion. TheFly.com saw 16 analysts upgrading their Fortinet price targets after its report. But how good was Fortinet's news?

You may be shocked to find it wasn't wonderful. Yes, quarterly sales rose 10% year-over-year. But billings, which predict revenue growth, only climbed 8.5%, suggesting a slowdown. Non-GAAP profits rose 16%, exceeding estimates. Generally accepted accounting standards showed $0.40 per share for the quarter, flat year over year. Worse, free cash flow fell 67% to $165 million.

Most of these data showed a dramatic slowing in growth compared to Fortinet earlier in the year. In 2023, Fortinet had 20% revenue growth, 14% billings growth, 37% non-GAAP profits growth, and 38% GAAP earnings growth. To be fair, its annual free cash flow grew 19%.

Indeed, Fortinet "beat earnings." CrowdStrike and Palo Alto Networks investors may breathe easy... for now. Since I own one of these three stocks (Palo Alto), Fortinet's Q4 result makes me anxious. 

In addition to Q4's downturn, Fortinet's first-quarter and 2024 outlook is concerning. Management expects Q1 sales of $1.3 billion to $1.36 billion. All of this range falls shy of Wall Street's $1.37 billion expectations. Fortinet expects annual revenues of $5.72 billion to $5.82 billion, but Wall Street expects $5.93 billion.

Earnings appear stronger in the short term. Fortinet's Q1 non-GAAP EPS outlook of $0.37 to $0.39 suggests it might outperform Wall Street's $0.37 forecast. The midpoint of Fortinet's earnings projection suggests the business may struggle to earn $1.67 per share, which analysts predict. The company issued no guidance for GAAP profitability or free cash flow.

Look forward to Palo Alto Networks (Feb. 20) and CrowdStrike (March 5) earnings releases. Wall Street expects Palo Alto to record 24% quarterly earnings growth in Q4 and CrowdStrike to climb 75%. Those targets are ambitious. The fact that analysts would want both corporations to have high ambitions for 2024 is even more concerning. Palo Alto must commit to 24% earnings growth for another year to avoid disappointing investors. CrowdStrike must offer 92% growth.

After trading at 64.5 and 81.3 multiples to anticipated earnings, Palo Alto and CrowdStrike appear priced for perfection. Any mistake on earnings day, whether in the results or the forecast, could send either stock plunging.