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Fortinet shares dropped about 25% after hours on Oct. 28 as product revenue growth slowed to 37% from 52%, and the selloff pulled down Salesforce, Palo Alto, Intuit and Adobe.
- Fortinet beat Q3 estimates but fell about 25% after hours to roughly $128.50.
- Product revenue rose 37% to $765 million, down from 52% growth in Q2.
- Palo Alto, Salesforce, Intuit and Adobe fell between roughly 5% and 8% in sympathy.
Lead
Fortinet (NASDAQ: FTNT) fell roughly 25% in after-hours trading on Wednesday, Oct. 28, after the cybersecurity company reported third-quarter results that beat Wall Street estimates but showed a sharp slowdown in product revenue growth. The shares had already closed the regular session down 5.8% at $174.29. They traded near $128.50 after the report, which would erase tens of billions of dollars in market value if sustained at the open.The selloff spread through the software sector. Palo Alto Networks (PANW), Salesforce (CRM), Intuit (INTU) and Adobe (ADBE) all slid in sympathy, reviving concerns about software valuations.
What Did Fortinet Report?
Fortinet reported non-GAAP earnings of $0.91 per share, ahead of the $0.86 consensus. Revenue rose 20% to $2.08 billion, against an estimate of about $2.06 billion.
Product revenue increased 37% to $765 million. Service revenue grew 13% to $1.31 billion, and total billings rose 29% to $2.34 billion. Non-GAAP operating margin reached a third-quarter record of 38.2%, up from 36.9% a year earlier. Free cash flow was $865 million.
For the full year, the company guided to revenue of $8.125 billion to $8.215 billion and non-GAAP earnings of $3.54 to $3.58 per share. Fourth-quarter guidance calls for revenue of $2.155 billion to $2.245 billion and earnings of $0.93 to $0.95 per share. Full-year service revenue guidance of $5.15 billion to $5.17 billion was trimmed slightly.
Why Did Fortinet Shares Fall Despite the Beat?
Shares fell because the pace of growth decelerated and the margin of outperformance narrowed. Product revenue growth of 37% compares with 52% in the second quarter. Total revenue growth slowed to 20% from 26% in Q2. Billings exceeded forecasts by only about 2%, versus roughly 11% a quarter earlier.
Service revenue of $1.31 billion also fell short of the roughly $1.33 billion consensus. Services are the recurring, subscription-style portion of the business and carry weight in valuation. The lower service guidance added to the concern.
The stock had also been trading at a premium multiple after a strong run. When expectations are elevated, even a beat with slower growth can prompt a sharp repricing.
How Far Did the Selloff Spread?
The move spread to peers within hours. Palo Alto Networks, CrowdStrike (CRWD) and Zscaler (ZS) each fell roughly 6% to 7% after hours. Tenable (TENB) dropped more than 5% despite beating its own guided metrics. Salesforce fell about 4.7%, and Intuit and Adobe slid between 6% and 8%.
Gen Digital (GEN) was a rare exception, rising about 6% after reporting record customer numbers and a sixth straight quarter of double-digit bookings growth.The decline also followed results from ServiceNow (NOW), which failed to meet investor expectations earlier in the session. Combined with Fortinet, the reports soured sentiment toward a group that had recovered part of its October losses.
Why Are Software Stocks Under Renewed Pressure?
Software stocks are under pressure because investors are questioning whether artificial intelligence will erode the pricing power and growth of established platforms. That concern has driven sharp swings across the sector this year, with the AI trade rewarding some names and penalizing others.
Cybersecurity had been viewed as relatively insulated, since network security hardware and AI-related infrastructure spending support demand. Fortinet's CEO Ken Xie said network security "remains the critical foundation of AI security." The market reaction suggests that investors now require accelerating, not merely solid, growth to justify current valuations.
What Comes Next for Fortinet and the Sector?
Attention turns to Thursday's open, where the after-hours moves will be tested against regular-session volume. Fortinet's fourth-quarter guide implies a continued, though steadier, growth path, with billings guided to $2.775 billion to $2.925 billion.
For the broader group, upcoming results from the remaining large software and security companies will show whether the Fortinet slowdown is company-specific, tied to a tough product-cycle comparison, or a sign of wider demand normalization. Palo Alto Networks, CrowdStrike and Zscaler are the nearest read-throughs.
Outlook
Fortinet delivered record margins, strong cash generation and its third guidance raise of the year, but a drop in product growth from 52% to 37% and a services miss drove a sell-off of about 25% after hours. The reaction spread to Palo Alto, Salesforce, Intuit and Adobe, underscoring how sensitive software valuations remain to any sign of deceleration.
