Wells Fargo Cuts Fortinet as SASE Demand Starts Slowly
Fortinet (FTNT) shares were downgraded from Overweight to Equal Weight by Wells Fargo on Tuesday. The analysts also increased the price target for the stock to $65 from $60 per share. This downgrade was based on several factors, including the slow start of SASE (Secure Access Service Edge) demand trends, which are a crucial driver of billings and free cash flow growth.
Challenges in SASE Adoption Hurt Fortinet’s Outlook
The primary reason behind the downgrade is the concern that the adoption of SASE is off to a slow start. While SASE is the right long-term strategy for Fortinet, it appears that competing against market leaders like Palo Alto Networks and Zscaler, who have a significant head start in this market, is proving challenging for the company.
Billings Growth Slows for Fortinet in FY24
Another factor impacting the downgrade is the slowdown in billings growth for Fortinet. The analysts note that billings growth is anticipated to decline to single digits in FY24. They further project that it may take longer for Fortinet to return to double-digit growth, indicating a potential challenge in accelerating growth for the company in the next couple of years.
Fortinet Struggles to Compete in SASE Market
The analysts’ concerns about Fortinet’s ability to compete in the SASE market are not unfounded. The slow start in SASE adoption, coupled with the head start enjoyed by market leaders like Palo Alto Networks and Zscaler, puts Fortinet at a disadvantage. While the pivot to SASE is the right long-term strategy, the analysts believe it will be difficult for Fortinet to catch up with its competitors.
Analysts Lower Estimates for Fortinet’s Future Growth
Based on the observed demand trends from resellers in the fourth quarter of 2023, the analysts have reevaluated their estimates for Fortinet’s future growth. They believe that their initial estimates for FY24 billings were too high and have thus adjusted them accordingly. As a result, the revised estimates for both FY24 and FY25 project modest growth expectations of 5.0% and 10.4%, respectively.
In conclusion, the recent downgrade of Fortinet by Wells Fargo reflects concerns about the slow start of SASE adoption and the company’s ability to compete in the SASE market. Slow billings growth and the lack of operating leverage in the next two years further dampen the outlook for Fortinet. While the analysts have adjusted their estimates to account for these challenges, it remains to be seen how Fortinet will navigate these headwinds and position itself for future growth.
Analyst comment
Negative news. As an analyst, I expect Fortinet’s market performance to be negatively impacted due to slow SASE adoption, intense competition in the SASE market, and slower billings growth. The revised growth expectations for FY24 and FY25 show modest growth prospects. Fortinet will face challenges in the next couple of years, and it remains uncertain how the company will address these issues and drive future growth.
