NEW YORK (TheStreet) -- Shares of Fortinet (FTNT) were falling 3.3% to $41.77 on heavy trading volume Wednesday after the security software company received downgrades from analyst firms Citigroup and Robert W. Baird.
Citigroup lowered its rating for Fortinet to "neutral" from "buy" Wednesday, according to Barron's. The analyst firm raised its price target for the company to $44 from $41 despite the downgrade.
Citigroup analysts Walter Pritchard and James Fish said that while Fortinet benefitted from elevated growth rates in the firewall UTM market recently, its exposure is now a hindrance. The analysts believe the company's refresh activity is now plateauing.
In a separate note, Robert W. Baird downgraded Fortinet to "neutral" from "outperform," while also raising its price target to $46 from $40.
"We expect fundamentals to stay strong at Fortinet," analysts Jayson Noland and Connie Qian wrote. "Our checks have remained consistent and mostly positive. We are attempting to avoid thesis creep, and get more selective in the Security space with the understanding that we could be leaving some upside on the table."
About 3.6 million shares of Fortinet were traded by 3:44 p.m. Wednesday, above the company's average trading volume of about 1.6 million shares a day.
Insight from TheStreet's Research Team:
Fortinet (Technology -- FTNT:Nasdaq, 1,050 shares, 9.31%; $45 price target): The stock jumped 6% this week. On Tuesday, Oppenheimer reiterated its Outperform rating and bumped its price target to $46 from $39 after its mid-quarter channel checks came back with a positive read that business is tracking ahead of guidance. On Monday, UBS reiterated its Buy rating on the name and increased its price target to $49 from $43 as the analyst believes the company's valuation continues to look attractive and management has been offering improved execution.
We believe trends in the network security space remain robust. Continued M&A activity in the security segment benefits Fortinet, as it remains an attractive asset to a larger company. We reiterate our stance that security preparedness is at the forefront of high-level discussions at all companies, and believe this will translate into increased sales for the industry and for Fortinet in particular. We remain long-term bullish on cybersecurity and especially favor Fortinet's robust balance sheet, impressive cash flow and lack of debt.
Separately, TheStreet Ratings team rates FORTINET INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate FORTINET INC (FTNT) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and premium valuation."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth greatly exceeded the industry average of 7.2%. Since the same quarter one year prior, revenues rose by 26.0%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- FTNT has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. To add to this, FTNT has a quick ratio of 1.86, which demonstrates the ability of the company to cover short-term liquidity needs.
- Compared to its closing price of one year ago, FTNT's share price has jumped by 79.14%, exceeding the performance of the broader market during that same time frame. Setting our sights on the months ahead, however, we feel that the stock's sharp appreciation over the last year has driven it to a price level which is now relatively expensive compared to the rest of its industry. The implication is that its reduced upside potential is not good enough to warrant further investment at this time.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Software industry and the overall market on the basis of return on equity, FORTINET INC underperformed against that of the industry average and is significantly less than that of the S&P 500.
- You can view the full analysis from the report here: FTNT Ratings Report