Cybersecurity Stocks underperform as Analysts Update Outlooks

In the volatile sector of cybersecurity, stocks struggled to keep up with the broader market on Monday. Analysts continued to reassess their outlooks, leading to simultaneous upgrades and downgrades for two key players: Fortinet Inc. and Cloudflare Inc.

While the S&P 500 SPX saw a rise of 0.6%, the shares of Cloudflare NET (-3.00%) fell by as much as 6.5%. This decline had a negative impact on the ETFMG Prime Cyber Security exchange-traded fund HACK, which remained flat. Meanwhile, Fortinet's shares FTNT (+1.42%) experienced an increase of up to 2.5%.

Fortinet shares experienced their worst one-day performance to date last Friday, plummeting by 25%. The company attributed this drop to an "unusually large volume of deals" being pushed out of the latest quarter. Additionally, executives highlighted macroeconomic challenges. Interestingly, Cloudflare faced a similar situation during the previous earnings season, as it reported delays in deal closures.

Guggenheim analyst John DiFucci expressed his views on Cloudflare in a note entitled "All that Glitters Isn’t Growth." DiFucci downgraded the stock from neutral to sell and established a $50 price target. Despite recognizing Cloudflare as "what true Cloud should have always been," DiFucci believes that the stock has become excessively inflated.

In contrast, Raymond McDonough, another Guggenheim analyst, expressed optimism regarding Fortinet in a note titled "Taking Advantage of the Digestion Period." He upgraded Fortinet's stock to a buy and established a $70 price target. Fortinet reached a record closing high of $80.28 in mid-July.

Cloudflare recently reported slightly better-than-expected results and provided positive guidance. Chief Executive Matthew Prince emphasized the company's strengths in AI inferencing.

Overall, the cybersecurity sector remains unpredictable, with market experts closely monitoring these key players and their future performance.

Fortinet and Cybersecurity Stocks

While Fortinet may face some challenges in the second half of the year, it is important to note that the company is not structurally impaired. According to McDonough, Fortinet's competitive positioning has not deteriorated, and it remains a high-quality technology company with a sustainable moat.

The initial high forecast for Fortinet has now been reset, and with the recent drop in stock price, some of the risks to the current outlook have already been priced in. McDonough expects that growth at Fortinet will resume and accelerate into 2024.

In related news, shares of Palo Alto Networks have declined by 2% on Monday and 8.1% on Friday. Analysts at Wedbush have removed Palo Alto Networks from their Best Ideas List due to concerns about the growth in the cybersecurity sector. However, Wedbush still maintains an outperform rating on Palo Alto Networks.

Palantir Technologies Inc. has also experienced a decline in its stock price, falling more than 3% ahead of its earnings report. Despite this drop, Palantir shares are still up over 170% year to date.

Microsoft, on the other hand, has gained momentum recently with its expanded cybersecurity offerings. This has put pressure on pure-play cybersecurity vendors such as Palo Alto Networks and Zscaler Inc.

Overall, while there may be headwinds in the cybersecurity sector, Fortinet remains a strong player with promising growth prospects. It is important for investors to carefully consider the current market landscape and the potential risks and opportunities associated with each company.