Fortinet Stock Crashed After Beating Earnings. Overreaction? (FTNT)

Fortinet beat earnings and still fell 22%

0:00 Fortinet beat on revenue beat on profit raised its full year outlook and the stock still fell over 22% on Thursday. its worst day in years. Even after that drop, Fortinet is still up roughly 80% this year. Still, the question isn't whether this business is broken. It's whether one number got blown out of proportion. And that number is hiding in the boring part of the report.

How Fortinet makes money (printer and ink)

0:18 Fortinet makes cybersecurity gear mostly firewalls, the boxes that sit between a company's network and the internet and decide what gets in. It makes money two ways. It sells the firewall itself, which it calls product revenue. Then it sells the subscriptions that keep that firewall updated and supported, which it calls service Think of it like a printer company. The printer is the product. The ink is the service, and Wall Street mostly cares about the ink.

0:38 Because you buy the printer once, you buy ink forever. So here's the quarter, total revenue was about $2.08 billion, up 20% from a year ago.

Fortinet Q3 2026 earnings numbers

0:45 Adjusted earnings were 91 cents a share, against about 86 cents expected. Billings, which is basically new business signed, grew 29%. a million dollars grew 51%. Product revenue, the printers in this analogy, grew about 37%. That's huge for a company this size.

The service revenue problem

1:02 Then, you get to the ink. Service revenue grew only in the low teens, and Fortinet trimmed its full-year service forecast by about $40 million at the midpoint. That's the whole crash right there. Wojak saw Beat and raised and bought at the opening bell. Nobody told him about the ink. Why does a 40 million trim knock off so much more in market value? Because service revenue is the predictable, recurring part that investors pay up for. If customers are buying the boxes but not adding as many subscriptions, future looks a little less locked in.

1:32 And investors value locked in money much more than one-time sales.

Fortinet's answer: a timing issue

1:35 Fortinet's answer is that it's a timing issue. Big enterprise customers buy the hardware first and switch on the services later. the revenue shows up in later quarters. Management also said service billings grew 26 percent and they expect service revenue to grow faster in 2027 than it did this year. CEO Ken Xie said demand is still very strong, with no slowdown in the quarter or early in the next one. Yeah, the demand is still very strong and we don't see any slowdown.

1:59 And there's one number that backs them up.

Deferred revenue: the number that backs them up

2:01 Deferred revenue grew 19%. As a CPA, this is the line I look at. Deferred revenue is money customers already committed for services Fortinet hasn't delivered yet. So it hasn't hit the income statement. It's like a gym that sold a bunch of annual memberships this month. The cash is signed up, but the gym only books it as revenue month by month as you show up. So some of the ink has already been paid for. It just hasn't been poured yet. Our 2027 service revenue is expected to grow at a higher rate compared to 2026, as we consider short-term deferred revenue growth as a good indicator for future service revenue growth.

2:34 So the company says, "Wait for it." The market says, "Show me." But here's why the market didn't wait.

Priced for perfect

2:39 Fortinet had more than doubled this year going into the report, it was trading above the average analyst price target. When a stock is priced for perfect, good isn't good enough. And Fortinet wasn't alone. ServiceNow dropped more than 20% the same morning after its own earnings. Intel fell about 20% after hours on Thursday night. The market this week is grading companies on their current quarter, not the last one.

The AI and industrial angle

3:02 There's also an AI angle that got buried. Fortinet launched a new AI security service, and it said an AI company is expanding its high-end firewalls across five more data centers. Its billings for factories and industrial systems grew nearly 40%. That's the part of the business protecting power plants. pipelines. in factory floors. One more thing, an unconfirmed report of a security breach at Fortinet was going around Thursday. Fortinet hasn't confirmed anything, so I'm not counting on it, but keep an eye out for news on it.

Analyst downgrades and price targets

3:26 Now, the analysts. Bank of America downgraded the stock to neutral. Barclays cut its target from $210 to $155. Cantor from $185 to $145 and Citi from $185 to $140. Mizuho is lower at $118. Fortinet is also putting money where its mouth is. It raises stock buyback authorization by $1.2 billion, leaving about $2 billion it can spend buying back its own shares. Here's the opportunity angle. That's what everyone's interested in, right? Even after cutting, Barclays, Cantor and Citi all have targets above where the stock closed on Thursday.

3:53 Chad noticed that the new lower targets are still above the current price. He's reading the fine print this time. Fortinet has been here before.

Fortinet crashed like this in 2025

4:01 In August 2025, it fell 22% in a day on worries that its firewall upgrade cycle was running out of steam. Over the past year, the stock went from the low 70s to nearly $200. That doesn't mean it repeats. But it does show the stock has crashed on a scary number before and kept growing. Now the bear case, because it's real.

The bear case for FTNT stock

4:19 If services keep growing slowly, Fortinet starts to look less like a subscription company and more like a hardware company. hardware companies much lower valuations. Hardware sales also come in waves. When the upgrade cycle ends, the box sales can slow down fast. then you need the ink business to carry the company. And even after the drop, it's not cheap. You're still paying a growth price for a company that just told you its most valuable revenue is growing slower.

4:43 At Thursday's close, it trades at nearly 40 times this year's adjusted earnings guidance. That's a price that assumes the ink business gets back on track. Negative Nelly says the ink drying up. Positive Pete says the ink is on backorder. So here's how I'd think about First figure out what you're buying.

How I'd think about Fortinet stock now

4:59 If you own Fortinet for the subscription story, the service number is the one to watch, not the headline beat. Next, watch the next two quarters. If service growth picks back up like management promised, Thursday probably looks like an overreaction. it doesn't, the market was right to worry. Last, think about your entry. A stock that fell over 22% in a day can keep swinging. you buy buying in pieces instead of all at once, lets you see whether the ink actually shows up.

5:22 This is a good business that just had a bad day. Those aren't the same thing. Tell me in the comments. Overreaction or warning sign. YouTube picked this next one for you unlike Wojak it read the entire report.