Fortinet's stock is taking a dive after earnings. Here's why.

By Emily Bary

Cybersecurity stocks are broadly falling as growth slows significantly in one of Fortinet's business segments

Fortinet's stock slid in Wednesday's extended session.

Fortinet's earnings report is dealing a blow to investors in cybersecurity stocks.

Shares of Fortinet (FTNT) are set to shed about a quarter of their value based on after-hours activity on Wednesday. Fortinet failed to live up to the high AI-fueled expectations that investors had for the cybersecurity sector as the company's product revenue grew significantly slower in the latest quarter than it did in the previous one.

Other cybersecurity stocks were falling as well. Shares of Palo Alto Networks (PANW), Zscaler (ZS) and SentinelOne (S) were each off more than 6% in Wednesday's extended session. CrowdStrike's stock (CRWD) was off more than 5%, and so was Okta's (OKTA).

Analysts took issue with various elements of Fortinet's report. Wells Fargo's Richard Polland wrote in a note to clients that while Fortinet beat expectations on metrics like billings and revenue, it did so by a smaller magnitude than investors have come to know.

For instance, Fortinet posted $36 billion in third-quarter billings, a metric that includes revenue yet to be officially recognized. That was roughly 2% above the midpoint of the company's forecast, according to Polland, whereas the company beat by about 11% on that metric in the second quarter.

He also noted that growth in product revenue slowed notably in the third quarter. Product revenue came in at $765 million, up 37% from a year before, whereas the growth rate was 52% in the second quarter.

Another concern, according to RBC's Dan Bergstrom, was the performance of Fortinet's service business. Service revenue amounted to $1.31 billion in the third quarter, versus the $1.33 billion that analysts tracked by FactSet were expecting.

KeyBanc analyst Eric Heath flagged that Fortinet cut its forecast for this year's service revenue. Now the company expects $5.15 billion to $5.17 billion in revenue for this segment, whereas its prior outlook called for $5.18 billion to $5.22 billion.

Product revenue in Fortinet's case refers to firewalls and broader secure-networking hardware offerings. Service revenue includes sales of security subscriptions.

Cybersecurity stocks have been hot this year as investors have reasoned that artificial intelligence will heighten the need for digital protection. Fortinet's stock was up 119% on the year heading into Wednesday's report.

"With the rapid evolution of the AI landscape, Fortinet is leading the next frontier of cybersecurity by securing AI workflow and protecting against AI-discovered vulnerability in real time through our core strengths in network security," CEO Ken Xie said on the earnings call.

-Emily Bary

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10-28-26 1919ET