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Massive stock buyback announcements dominate tech news, but don't miss the cybersecurity issues highlighted by Fortinet and Cloudflare
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income.
During a conference call late Thursday to discuss Cloudflare's results, management used the word “uncertain” at least five times to highlight the geopolitical changes that have changed customer buying behavior. “I'm scared of a lot of things right now,” CEO Matthew Prince said. “We're in a more uncertain environment. What we're seeing are signs of increased uncertainty.”
Cloudflare's full-year sales forecast was conservative. The company is sticking to its previous guidance for revenue to be between $1.648 billion and $1.652 billion, with the midpoint of that range the consensus call among analysts tracked by FactSet. It is slightly below the current value of $1.651.
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This forecast and Mr. Prince's comments likely cast a shadow on the company's first quarter results. The company's profit was 16 cents, beating analysts' expectations of 13 cents. He also had sales of $378.6 million, which exceeded his expectations of $373.1 million.
As of Friday afternoon, the stock was down 18% to $72.78. That puts it on pace for its biggest single-day decline since April 28, 2023, when it fell 21%, according to Dow Jones Market Data.
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Part of the problem lies in the starting point. The stock's price has doubled in the past year.
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Increased by 24%. “After rising 100% last year, NET stock needed strong metrics and guidance to move higher,” Needham's Alex Henderson wrote.
This stock is also one of the most expensive stocks in the security software space. Heading into the earnings release, Cloudflare was valued at 16.5 times expected earnings over the next 12 months. The group of security providers Guggenheim covers that rivals his Cloudflare has an average multiple of 6.9x.
Cybersecurity companies have faced headwinds in recent quarters. Mr. Prince said earlier this year that the larger theme of last year continued: buyer caution and corporate reluctance to spend.Competition from much larger and better-funded rivals such as Amazon Web Services and Microsoft
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Azure also has risks.
Fortinet, a $49.75 billion cybersecurity company, is also facing challenges. In after-hours trading Thursday, the company announced quarterly billings of $1.41 billion in the first quarter. That was below last year's level and short of Wall Street's $1.425 billion estimate.
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Sales for the first quarter were $1.35 billion, slightly above expectations of $1.34 billion. Earnings were 43 cents, beating expectations of 38 cents.
Shares fell 8.4% to $59.74 on Friday.
Indeed, falling stock prices may present a buying opportunity. Henderson maintained a “buy” rating on Cloudflare stock, writing that management's prudent guidance has “de-risked” the stock.
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He sees the stock reaching $135, implying an 82% upside from current levels.
Wedbush's Taz Koujargi maintains an Outperform rating on Fortinet, but lowers his price target from $86 to $78. “While we still believe FTNT's story will turn around for growth over the next six to 12 months, it is clear that the company is navigating a volatile environment in this space,” he said.
Email Karishma Vanjani at karishma.vanjani@dowjones.com.
