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Fortinet Must Secure Market Share

Stocks in this article: FTNT CHKP CSCO FIRE IBM ARUN PANW

NEW YORK ( TheStreet) -- With so much of our daily lives being so heavily reliant upon computer/smartphone connectivity, I believe there will always be demand for companies that protect the world's precious data against cyber criminals. While Fortinet (FTNT) still enjoys a meaningful chunk in the enterprise network security market, the company has been unable to manufacture growth and establish any sort of momentum.

Consequently, shares of Fortinet, which is down more than 6% year-to-date, have grossly underperformed market leaders Check Point (CHKP), which is up 21%, and Cisco (CSCO), up 18%. Although there is credible evidence to suggest that Fortinet's revenue struggles are more market-related than execution failures, investors are nonetheless feeling "insecure" about the company's direction -- and with good reason.

Three months ago, when Cisco announced its $2.7 billion deal for anti-hacking giant Sourcefire (FIRE), it was clear that Cisco, which had already been on an acquisition spree, was looking to leverage its strong enterprise presence in hardware with higher-margin security services.

By virtue of Cisco paying 12 times revenue for Sourcefire, which amounted to a 30% premium, there's no denying it was an expensive deal. But this did little to move Fortinet's stock, which the Street then rushed to proclaim as "cheap" relative to Sourcefire's deal. Some even suggested that IBM (IBM), among others, should buy Fortinet.

Fast-forward three months later, not only has there been no deal, but Fortinet's stock is actually trading below where it was prior to Cisco's announcement. On Wednesday, the company will report its third-quarter earnings results and management will try to sell the Street on Fortinet's plans not only to revive growth, but also on ways the company plans to fight off its own cyber threats known as the competition.

The Street will be looking for 11 cents in earnings per share on revenue of $151 million, which would represent close to 11% year-over-year revenue growth. While this would reflect a deceleration of growth from the 14% posted in the July quarter, it would be nonetheless encouraging if Fortinet was able to post double-digit growth in a market that is still struggling with corporate IT spending.

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