It is possible Fortinet is expecting competition to ramp up or that the company is being overly conservative. I think it's a combination of both.
As noted in the opening, Fortinet's valuation implies the company is just going to run away with the security market. But management's guidance implies a different thought process. What's more, with its sales and marketing expenses growing, it seems the company is starting the feel the effects of increased competition from rivals such as market leaders Cisco ( CSCO) and Check Point ( CHKP). New arrival Palo Alto Networks ( PANW) continues to show more momentum in the market and Fortinet may find it increasingly challenging to overtake the current leaders. As impressive as Fortinet's growth was during the quarter, it paled in comparison to Palo Alto, which reported a year-over-year increase in revenue of 88%. Likewise, Palo Alto's overall revenue for fiscal 2012 grew 115% to $255.1 million -- exceeding its 2011 mark of $118.6 million. As a Fortinet investor, it would be hard to see these numbers and not develop some anxiety. Also it doesn't help that Ken Goldman, the company's CFO, has agreed to become the CFO at search giant Yahoo! ( YHOO). While I don't think this somewhat less-than-stellar quarter had anything to do with his departure, conclusions to the contrary will be drawn. Also, anything that introduces uncertainty such as a departing executive does very little to instill investor confidence.
Understandably, investors showed some concern with Fortinet's earnings results and the guidance that followed. But the numbers were far from horrible. Rather, the uneasiness stemmed from the enormous expectations that have been placed on the company to produce the level of growth its valuation presumes. Though the company did not issue the beat-and-raise quarter investors were looking for, the report did highlight what a good growth story Fortinet continues to be. The company's challenge is to convince the street that the slight decline in performance is not the beginning of a trend. In the meantime, investors need to ask themselves, how much value is there is the stock that trades at a price-to-earnings ratio close to 50 when rivals Cisco and Checkpoint trades at multiples of 12 and 14 respectively. As a value investor, I would stay away from the stock at currently levels. But should it drop another 10% falling to $17 or below, then I might have to reconsider. At the time of publication, the author held no position in any of the stocks mentioned. Follow @rsaintvilusThis article is commentary by an independent contributor, separate from TheStreet's regular news coverage.