Security software operators got crushed yesterday. For example, Check Point Software Technologies (NASDAQ:CHKP) shares fell by 13%, and Fortinet’s (NASDAQ:FTNT) plunged by a grueling 19%.
So what happened? And might there be an opportunity for investors to snag some bargains?
First of all, Check Point and Fortinet posted lackluster guidance. In the case of Check Point, it forecasted fourth-quarter earnings per share of 83 cents to 91 cents. The Street was looking for 90 cents.
As for Fortinet, its Q4 guidance was for EPS of 15 cents. However, the consensus was 16 cents.
On their conference calls, Check Point and Fortinet said Europe was a major drag on results. There was even weakness in China.
It’s certainly true that security technology is critical, but many companies already have implementations. That means they can easily put off purchases of new software.
But competition is likely another factor as well. Consider that Check Point and Fortinet contend with fierce operators like Cisco (NASDAQ:CSCO), Juniper (NYSE:JNPR) and IBM (NYSE:IBM).
What’s more, there are also next-generation security companies. Just look at Palo Alto Networks (NYSE:PANW), which recently pulled off a successful IPO. The company has a security platform that focuses on the emerging threats from the cloud, mobile and even social networking. In the latest quarter, revenues spiked by 88% to $75.6 million.
Now the good news is that Check Point and Fortinet have been launching upgrades to their products. And it definitely helps that they continue to generate substantial cash flows.
Despite all this, investors should still be wary. It will take some time for Check Point and Fortinet to get traction with their new offerings. Besides, their shares are still at pricey valuations. CheckPoint has a price-to-earnings ratio of about 15 and Fortinet’s is a lofty 52.
So in the meantime, it’s probably better to avoid these companies for now. When growth plays slow down, it often means continued lackluster results for shareholders.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.