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Fortinet Must Secure Market Share

Billings, which grew 10% in the July quarter, will be a closely monitored metric of how well revenue is expected to be as the year enters its last quarter. Bulls will disagree, but I believe aside from Fortinet's revenue growth struggles, it has been the company's weaker-than-expected performance in billings that has kept the stock from advancing relative to its other high-multiple peers, like Checkpoint.

The other issue is that the security services industry has become highly congested with several new entrants such as Aruba Networks (ARUN), which has begun to position itself for the growing demand of threat-prevention. And given Fortinet's current market standing and its strong reputation for quality, the company's products are often on the higher-end in terms of price.

Consequently, with shrinking corporate budgets, IT leaders have shown a willingness to sacrifice quality for affordable pricing, which has impacted Fortinet's market share. By contrast, during that span, Palo Alto Networks (PANW) has strung together impressive numbers, including 54% revenue growth in the recent quarter.

To that end, absent a meaningful change in Fortinet's strategy to uncover ways to produce above-average growth and margins, I don't see any catalysts -- beyond an acquisition -- that will push this stock higher. Not to mention, the stock is already expensive with a P/E that is 4.5 times higher than Cisco and 3 times higher than CheckPoint.

So, while I've always appreciated Fortinet's strategy of acquiring higher-margin business, management must now re-evaluate the effectiveness of that approach on the basis of these new entrants, like Palo Alto, for which profit is not yet a priority. They want market share. Couple this with Cisco's recent buy of fast-growing Sourcefire and it looks as if Fortinet -- as dominant as its products may be -- may remain a laggard for the foreseeable future.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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