Why Fortinet Stock Is Falling Hard Today

What happened

Investors sold off Fortinet (FTNT -16.33%) stock Thursday morning in the wake of the second-quarter report it delivered after the market closed Wednesday, even though the company beat analysts’ revenue and earnings estimates. Instead of focusing on the positives, it appears investors put more weight on Fortinet’s somewhat disappointing third-quarter revenue guidance.

The quick sell-off pushed the tech stock down by 16% as of 12:48 pm ET.

So what

Fortinet reported non-GAAP earnings per share of $0.24 in the quarter, up from $0.19 in the year-ago quarter and ahead of Wall Street’s average estimate of $0.22. The company also posted a solid year-over-year revenue increase of 29% to $1.03 billion, slightly ahead of analysts’ consensus estimate of $1.027 billion.

Image source: Getty Images.

Other highlights from the quarter included product revenue of $400.7 million (up 34%) bookings of $1.38 billion (up 42%) and billings of $1.3 billion (up 36%).

“We delivered strong revenue and billings growth in the second quarter driven by an over 50% year-over-year increase in the number of transactions larger than one million dollars,” Fortinet founder and CEO Ken Xie said in the earnings press release.

But despite Fortinet’s growth, investors focused their attention on its third-quarter revenue guidance figure of $1.12 billion, which was slightly below analysts’ consensus estimate of $1.13 billion.

Additionally, investors may have been disappointed that the company’s cash flow from operations decreased 23% from the year-ago quarter to $323.4 million. They also likely weren’t pleased that its free cash flow declined by 28% in Q2 to $283.5 million.

Now what

Fortinet’s severe share price decline Thursday is a bit surprising. Even in light of the drop in free cash flow and third-quarter revenue guidance that was slightly lower than analysts’ consensus estimate, the market may be overreacting.

It’s possible that Fortinet shareholders had been hoping for larger and revenue beats than they got earnings in the quarter. It’s also likely that at a time when many investors are nervous about a potential recession, Fortinet investors decided that the company’s solid second-quarter results just weren’t good enough.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Fortinet. The Motley Fool has a disclosure policy.

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