“Well-positioned to outperform” was how Goldman Sachs described
Fortinet’s (NASDAQ: FTNT) current status when they upgraded the company on Tuesday. Having previously had their shares at a Neutral rating, Goldman analyst Brian Essex saw fit to up them to a Buy rating while also pushing the price target up to $150.
This is good news for Fortinet bulls who’d have been forgiven for feeling that momentum was starting to go against them. Like many other tech names out there, Fortinet has had a fabulous couple of months and their shares hit all-time highs in July. But since then they’ve struggled to push on and instead have formed a dangerous-looking trend of lower highs and lower lows.
Solid Momentum
The company’s Q2 earnings in August still showed revenue growth of 18% year on year and posted EPS numbers that were well above what analysts expected. The $20 billion cyber-security company from Sunnyvale, California has, for all wants and purposes, done well from the COVID driven growth in working-from-home. But in August’s report, softer billing numbers than expected took the shine off the overall beat and helped bring shares down 25% from their highs by the start of September.
Right around then, UBS maintained their Neutral rating and cited tougher H2 comps as the main blocker to them jumping in with both feet. At the same time though, they raised their price target to $140 and noted Fortinet’s "improved secular positioning" as well as its "expanded market share and growth runway" thanks to the work-from-home movement. In the coming quarters we should be seeing increased margin leverage as a result they argued.
This was enough positive sentiment to help the bulls to put up a solid fight in September and shares were able to consolidate without giving up much more ground. Goldman’s upgrade from this week comes on the back of a 20% rally over the past three weeks and should be enough to propel shares back towards July’s high. In a note to clients, Goldman’s Brian Essex forecasted "a recovery in billings this quarter, with better product revenue growth relative to expectations" while also noting how “large enterprise headwinds may be abating sooner than anticipated."
Getting Involved
This is exactly the kind of stuff investors love to hear about a company that’s double-digit percentage growth and that has a COVID friendly product offering. That being said, as UBS cautiously noted in August, Fortinet is not without its risks.
For starters, shares are currently trading at a price-to-earnings ratio of 55, which even for a tech stock is fairly high. With Q3 earnings due in the next few weeks, it’s absolutely crucial that the numbers justify the current run, otherwise Wall Street will lose patience fast. Shares are also coming up against some fairly solid resistance around the $150 mark, and it’s where they’ve been turned back from a number of times now. It’s a big, round, psychological number that everyone is thinking of and a natural target for the bulls to take out.
They’ll be focusing on the solid support that exists now around the $115-120 level thanks to September’s consolidation. On the longer term, shares have been in what looks like a perpetual up trend that COVID merely interrupted, so it’s not really a case of if they’ll go higher but more about when and by how much. If they can shake off the lacklustre end to the summer with a strong print next month, the bulls will have the signal they’re looking for to justify a drive for $150 and beyond.
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