4 Reasons Analysts Are Downgrading Fortinet

Deciphering The Downgrade

Since the beginning of June, three analysts, including Citigroup, Baird and Cowen, have downgraded their rating of network security vendor Fortinet. While it is important to note that many analysts remain positive about the Sunnyvale, Calif.-based vendor, the three analysts do bring up some important points about what challenges the vendor faces in the market today, including around the company's channel partners.

Fortinet declined to comment, noting the company is in a quiet period prior to next week's earnings.

Here are some of the challenges that analysts say are facing Fortinet right now and through the end of the year.

Palo Alto Networks Competition

Stiff market competition against rival Palo Alto Networks was referenced as a primary driver by all of the analysts who downgraded the Fortinet stock. In particular, Baird senior analyst Jayson Noland wrote that, particularly in the U.S. market, Fortinet has "seen its success diverge" with SMBs and service provider partners, with flat growth in those markets compared with 70 percent growth in the enterprise space.

"We’ve had international and regional security resellers tell us they prefer Palo Alto to Fortinet as a long-term, strategic partner," Noland said in his report, which downgraded Fortinet from "outperform" to "neutral" in June.

Slowing Refresh Activity

After a year with a "strong" refresh cycle, Baird's Noland said that it expects this year to be different. He said the company is "well over halfway" through the refresh of NP6, the company's most recent network processor line, and "about halfway" through its investments in sales and marketing. As the vendor readies itself to now refresh its CP9 content processer line, Noland said he doesn’t expect the move will be a "significant catalyst" through the remainder of the year.

Competitive Field

There's a lot of competition in the unified threat management space, a factor that multiple analysts groups agreed played against Fortinet in the market. Both Baird and Citigroup cited this as part of a reason for a downgrade of the vendor. In the Citigroup report by analyst Walter Pritchard, who in June downgraded the vendor from "buy" to "neutral," he said the vendor is gaining market share but is seeing stiff competition from Palo Alto Networks and Proofpoint. Those vendors are on a much faster growth trajectory, he said. Baird's Noland agreed, but said the vendor is also challenged by going head to head against "larger incumbents" like Cisco System, Juniper Networks and Check Point Software Technologies.

"These competitors have more resources than Fortinet and may decide to place more emphasis on Fortinet’s targeted market segments. Smaller, yet innovative competitors such as Palo Alto Networks may gain continued traction as well," Noland said.

Difficult Market

Fortinet set a high sales bar for itself in 2014, with prior inventory shortages drawing demand, network refreshes and a growing channel, Cowen analysts said in their report. However, the analysts said that the coming year will "likely not be as robust" as the company faces stiff competition and less favorable market conditions overall. For that reason, Cowen downgraded the firm from "market perform" to "underperform."

"The security market remains strong, and [Fortinet's] recent execution has unquestionably been very good. However, we believe tougher compares, an increasingly competitive environment, and challenges truly penetrating the enterprise could make it difficult for [Fortinet] to meet or exceed investor expectations over the next 12-18 months," the Cowen report said.