Fortinet Downgraded by Morgan Stanley Due to Disappointing Firewall Refresh

Fortinet was downgraded to Underweight by Morgan Stanley due to a disappointing firewall refresh. Morgan Stanley also reduced its price target to $67 from $78. The downgrade was attributed to Fortinet's continued performance in the firewall refresh market.

Fortinet (NASDAQ: FTNT), a leading cybersecurity company, faced a significant setback as Morgan Stanley downgraded its rating to "underweight" and reduced its price target to $67. This move comes on the heels of the company's Q2 earnings report, which showed mixed results, with earnings beating expectations but revenue guidance falling short of market expectations [1].

The downgrade was driven by concerns about the firewall refresh cycle and tempered revenue guidance. Morgan Stanley cited that Fortinet's firewall refresh cycle may lower future estimates, despite the company's strong billings growth and services revenue increase [1]. The brokerage also noted that Fortinet's expanding customer base might not translate into as much incremental revenue as initially expected.

Fortinet's Q2 revenue reached $1.63 billion, a 14% year-over-year increase, with net income at $491.1 million and diluted EPS of $0.64, beating the estimate by 8.27% [1]. Services revenue grew 14.1%, while product revenue climbed 12.6%, reflecting a recovery from prior quarters. Billings reached $1.73 billion, up 15% from last year, reinforcing strong demand and providing forward visibility.

Despite the downgrade, Fortinet's high-margin segments, such as Unified SASE and SecOps, continue to grow at a robust pace. These segments carry gross margins close to 88%, compared to 67% in products, and underpin Fortinet's long-term thesis of expanding its software and services footprint [1].

The stock's valuation has compressed sharply from its early 2025 highs, with the PEG ratio of 2.12 now looking more aligned with expected growth rates of 10–13%. Management reiterated confidence in long-term revenue expansion, forecasting FY2025 sales of $6.75 billion and FY2026 at $7.54 billion [1].

The market reaction to the downgrade was immediate, with Fortinet's shares falling about 3% in premarket trading [2]. However, the selloff appears to have been exaggerated, as Fortinet's fundamentals remain strong, with robust cash generation and a fortified balance sheet.

In summary, while Morgan Stanley's downgrade adds uncertainty to Fortinet's stock, the company's strong earnings report and high-margin growth segments provide a solid foundation for long-term value creation. Investors should closely monitor Fortinet's progress in expanding its software and services footprint and the impact of the firewall refresh cycle on future estimates.

References:
[1] https://www.marketscreener.com/news/analysts-recommendations-acuity-block-elf-beauty-fortinet-nvidiaa--ce7c50d3dd8ff02c
[2] https://www.tradingview.com/news/reuters.com,2025:newsml_L6N3UP0IN:0-cybersecurity-firms-sailpoint-and-zscaler-rise-on-morgan-stanley-upgrade-fortinet-slips-on-downgrade/