The world has changed but the metamorphosis is not complete. We are in the middle of a global migration to a life that depends heavily on the cyber world. Almost every aspect of our lives now depends on technology and the cloud. And the rate of adoption for the rest is exponential. This is a trend, not a fad so it won’t reverse.
As we move our lives to electronic format, we need more protection there. Cybersecurity services have become something we can’t live without. Fortinet (NASDAQ:FTNT) is one of those companies and its future should be prosperous for years to come.
Last week, FTNT reported earnings and the results confirm that this is a stock to own for the long term. This is not a situation where there will be a clear winner or loser among the bunch, however. A number of cybersecurity companies like FTNT, Palo Alto Networks (NYSE:PANW) and FireEye (NASDAQ:FEYE) can thrive for years.
FTNT beat earnings estimates by 20% and delivered an increase of 40% from this time last year. Clearly management knows how to implement on plans. But one would not have guessed it from FTNT stock reaction to earnings. The stock fell 6% on the headline.
This morning, the equity markets are falling from President Trump’s tweet that threatens to derail the negotiations with China. So FTNT is retesting its lows from last week’s headline.
The FTNT earnings dip is not a statement against the company prospects, but a normal part of a breakout stock price action. Fortinet stock came into the earnings week up almost 70% in a year and 30% just this year. Clearly there was room for a dip without changing the overall direction or bullish thesis in it.
So if I own the shares I stay in them until there is evidence of business deterioration and this report says the exact opposite. FTNT also reported a 17% increase in sales so they know how to grow the top line and manage profitably to deliver on the bottom lines as well.
So the stock action reflects misalignment in expectations not the fear of bad results. These days Wall Street throws a tantrum if management doesn’t over promise with their guidance. It’s like they celebrate the teams that like to declare risk ahead of time.
The expert analysts cannot agree on it so you should use your own judgement and trade ideas on FTNT stock. Last week Wedbush and RBC maintained their ratings on it and raised their price targets by $5 each to 105 and $90 respectively. While Citigroup downgraded it to SELL and lowered the price target to $78.
FTNT sells at 42 trailing P/E ratio, which sounds high in absolute terms. But among its competitors it’s a bargain. Cybersecurity stocks are momentum stocks so they move fast — especially on earnings events. Even after this earnings dip, FTNT stock is still up 120% in two years which is four times that of the S&P 500.
So the risk on this stock is so far well worth the reward. For the investors, FTNT stock offers the opportunity to hold it for the long term and profit from it. It also offers the traders who prefer to profit from shorter term entry points.
Trading FTNT Stock
So is there an opportunity for either styles on this dip? Yes, for both.
If someone is wanting to own the shares for long then they need not worry about sniping the perfect entry point. Buy it now and hold it for the long term. If the equity markets are higher then so is FTNT.
Shorter term and for the traders among us, if the bulls can maintain Fridays bottom tail of the candle as a floor they can use it as the base for a rebound rally that has legs.
Above $87 per share FTNT could embolden buyers to try and fill the gap. Then from there the momentum could carry it back on track to setting higher highs. If that happens I’d get out near the highs because for the same reason that the Friday low is a base, the April top weekly candle is a roof for now.
So in summary, the negative reaction to the earnings event in Fortinet stock is not a reason to change the long term bullish thesis on it. This is merely part of normal price action of a momentum stock trying to perpetually set new highs.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.