Why Is This Analyst Downgrading Fortinet?

• Fortinet Inc FTNT shares have been heading south since July 27 and are down 45 percent.
• Deutsche Bank’s Imtiaz Koujalgi downgraded the rating for the company from Buy to Hold, while reducing the price target from $49 to $34.
• Lighter demand trends and a slowdown in momentum in 4Q15 increase the downside risk for the stock, Koujalgi stated.

Analyst Imtiaz Koujalgi mentioned that market checks indicated a slowdown in momentum for the company in 4Q15. Although firewall refresh activity is likely to continue in 2016, customers have started looking beyond the firewall to advanced threat detection and newer security products.

“Although our broader firewall checks did not point to any material pull-forward of firewall refreshes, channel partners did say that some of the euphoric buying we saw in 2014 and 1H15 might be over, and it's fair to expect demand trends in 2016 to be lighter vs. 2015,” Koujalgi wrote.

The company’s organic billings growth decelerated from 40 percent in 2Q15 to 33 percent in 3Q15. This, coupled with soft 4Q15 checks and slower demand trends in 2016, increases the downside risk to expectations.

Increased sales and marketing spend enabled Fortinet to report robust growth in 1H15. Koujalgi added, however, that this resulted in margin contraction. “FTNT's operating margins are down 3 years in a row and a with slightly more modest demand environment in 2016, we would expect FTNT to temper its growth of sales and marketing spend and guide to at least flat margins.”