What happened
Shares of Fortinet (FTNT 0.23%) dropped 22.5% in August, according to S&P Global Market Intelligence. The company reported quarterly earnings that were roughly in line with investor expectations. However, the cybersecurity leader's outlook had growth investors worried about the next few quarters.
So what
Fortinet's quarterly earnings narrowly beat analyst estimates despite falling just short of Wall Street's revenue forecast. The company's top line rose by 26% over the prior year, which is a respectable rate of expansion. Unfortunately, some of its other metrics were less impressive.
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Fortinet's bookings, which are a strong indicator of future revenue, were only up 18% from last year. That suggests a deceleration relative to previous bookings numbers and the current revenue growth rate. The company attributed this weakness to difficult macroeconomic conditions that are negatively impacting sales results. The slowdown has coincided with a slowdown in earnings growth and lower free cash flow.
FTNT Revenue (Quarterly YoY Growth) data by YCharts
Growth stocks tend to have aggressive valuations that assume significant favorable performance. It doesn't take much bad news to create uncertainty and scare growth investors. Stocks like Fortinet that have P/E ratios above 50 are susceptible to big drops whenever the bullish growth narrative gets threatened.
Now what
Despite the recent issues, Fortinet is still growing, and its rate of expansion is fairly impressive compared to most companies in the stock market. Unlike many of its peers, Fortinet is a profitable company that's produced more than $1 billion in free cash flow so far this year. It's still considered a leader in the network firewall industry, and there are undeniable long-term growth catalysts for this niche of the cybersecurity industry. It could succumb to competitive or operational pressures, but the pieces are in place for success moving forward.
The recent sell-off has created a potential buying opportunity for long-term investors. The stock's forward P/E ratio is under 43, and its price-to-sales ratio fell to 10. These valuation multiples are aligned with market norms relative to its current and forecast growth rates.
FTNT PE Ratio (Forward) data by YCharts
If the current setbacks are temporary and the company can roughly sustain its current growth rate over the medium term, its valuation creates an opportunity. Investors who are committed for the long haul are likely to see returns if the company's growth ever recovers from the present swoon.
