Fortinet Inc (FTNT), Cisco Systems, Inc. (CSCO): Is This Tech Stock About to Make a Comeback?

It’s been a difficult year for investors in IT security company Fortinet Inc (NASDAQ:FTNT). They have been forced to watch the stock fluctuate wildly, and then settle at a price similar to which it began the year. On the one hand, Fortinet Inc (NASDAQ:FTNT)’s underperformance to the Nasdaq is justified; throughout 2013, the company has been lowering full-year guidance. On the other hand, the key to investing is always to look at the pros and cons of investing in the stock right now. So is Fortinet Inc (NASDAQ:FTNT) worth buying now?

After delivering a nasty warning in the first quarter, Fortinet Inc (NASDAQ:FTNT) returned to form in the second. It beat its own revenue expectations by $4.4 million, posting $147.4 million. Earnings were in line with expectations, and it appeared to resolve the larger part of the issues that caused the shortfall in Q1. There are four key takeaways from these results that might lead you to be positive on the stock.

First, in the previous quarter, Fortinet Inc (NASDAQ:FTNT) had explained that its billings miss of around $12 million was a combination of weakness in orders from telco service providers ($6 million-$9 million), and the Latin American region ($4 million-$6 million). Moreover, it had an inventory shortfall that created a $2 million-$4 million shortfall. The good news is that telco orders came back in second quarter, and Fortinet Inc (NASDAQ:FTNT) successfully rectified the inventory issue. However, Latin America still remains tough

The second takeaway is there were some positive signs from deal sizes reported in the quarter

Source: company presentations.

The larger deals (above $500,000) came back strongly in the quarter, and this is probably due to a return to spending by the telcos. In addition, Fortinet has seen a strong rise in the number of smaller deals signed in the last three quarters. The last point is a sign that it’s capturing the growing market for small and medium size business who want to prioritize cyber security.

The third positive point is that Fortinet’s guidance looks overly cautious.

Source: company accounts.

In fact the second quarter turned out to be consistent –in terms of sequential growth- with the previous years. However, the guidance for the third quarter looks historically conservative.

The final takeaway is that Fortinet made some positive commentary in its conference call. The company expects to take market share, and declared that it wasn’t seeing any pricing pressures at the moment. This suggests that even in a weak spending environment, it can still generate growth.

The cons

There are three reasons to be cautious over the stock.

The first is that competition is going to increase. Cisco Systems, Inc. (NASDAQ:CSCO)’s  purchase of Sourcefire will surely result in increased investment. Cisco Systems, Inc. (NASDAQ:CSCO)’s security division’s growth turned negative in its last quarter, and the Sourcefire acquisition is an attempt to regain traction in the sector.

This sort of deal is critical to Cisco Systems, Inc. (NASDAQ:CSCO) because its core switching and routing divisions are generating very-low-single-digit-growth, it needs to push growth in its peripheral activities. Moreover, Cisco Systems, Inc. (NASDAQ:CSCO) can bundle security solutions with a whole range of other technology offerings.