What happened
Fortinet (FTNT 0.11%) shares rose higher due to momentum among cybersecurity stocks, but it wound up losing most of those gains as macroeconomic conditions triggered a broad stock sell-off. The stock was up 0.9% for the full month of September, outpacing the S&P 500 by 10.5 percentage points even though there wasn't any major news about Fortinet.
So what
Zscaler (ZS -0.01%) published a strong quarterly earnings report on Sept. 8. Its revenue grew an impressive 60% during the quarter and outpaced Wall Street's forecasts. That's not out of the ordinary for the handful of cybersecurity industry leaders, but this was cause for optimism among growth investors. Fortinet and some of its peers had published less inspiring results in previous months, driving concerns that security stocks would suffer from the same pullback in corporate spending that's plaguing other enterprise software as a service (SaaS) products. Zscaler's report suggested that cybersecurity could be one of the few industries that could sustain growth through a global recession. That optimism filtered through most of the stocks in the sector.
FTNT, ZS, PAN, CRWD data by YCharts
Fortinet's valuation might explain its large jump on another company's news. The stock is down almost 30% this year and trades at a much lower price-to-sales (P/S) ratio than some of its peers. That sort of discount makes stocks more prone to upward movement in the short term. It seems that investors looked to capitalize on an industry trend by scooping up inexpensive beneficiaries.
Unfortunately, that wasn't enough to protect Fortinet from the market declines that beat up growth stocks across the board. It wound up surrendering almost all of the previous monthly gains, but that was still a lot better than the major indexes.
Image source: Getty Images.
Now what
There are great reasons to feel bullish about cybersecurity stocks and Fortinet's place in that industry. Enterprises from every industry already rely heavily on cloud-based software, and that connection is only going to deepen with increasing utilization of machine learning, data analytics, and remote collaboration. Organizations need to protect sensitivity on behalf of their customers and employees, and the scale of this obligation is likely to keep growing. Fortinet provides hardware and software to enhance network security, and it's recognized as a leader in this field.
Fortinet reported an impressive 30% revenue growth last quarter. That's slower than some of the other stocks in the industry, but it's still really strong. The company's exposure to hardware sales has also negatively impacted investor sentiment. This opens the door to more supply chain challenges, which are creating some operational headaches for Fortinet.
It's reasonable to expect Fortinet to trade at a modest discount to its high-flying peers, but that shouldn't exclude generating great returns over the long term. This is an appropriate price point for bullish investors. Fortinet still isn't exactly cheap, with a forward price-to-earnings (P/E) ratio above 40 and a P/S above 10, so be prepared for additional volatility if you're a shareholder.
