October 23, 2015 | 12:48 PM by Fahad Khalid | fkhalid@jaguaranalytics.com

Unlock: Fortinet (FTNT) Earnings Play

(This note was issued to Premium subscribers on October 13)

Fortinet (FTNT) – Buyer of 1,000 in the money November 45 puts paid $4.20 today, about $420,000 bearish bet on 1.5x daily average put volume. And yesterday morning buyer of 2,300 November 43 puts paid $2.70 on wide bid/ask spread of 2.35 x 2.70. That was $270,000 bearish bet now reflected in open interest. Two consecutive days of above average offer side put volume.

Two weeks ago on September 30 we presented a contrarian bearish play on another cyber security stock that is very popular among analyst and investors: Palo Alto Network (PANW) December 165/145 put spread for $6.50 that can be found here.

We are not arguing against strong FTNT fundamentals. Back in July the company posted +40% y/y billings growth to $297M (about $33M above estimate). EPS was 2 cents better and margins expanded by 280 bps. Company also raised billing guidance but lowered EPS guidance due to lower margin after Meru integration. Overall it was a great quarter and nothing in our research suggests that growth is slowing.

The issue is current state of market where dominant theme remains multiple contraction. You can value a high growth stock two ways: expanding earnings and/or expanding multiples. In current environment investors are no longer willing to pay sky high earnings multiples. We are seeing this in ANET, DATA, N, FEYE, PANW and several others. FTNT is no different. The $7 billion company currently trades at 80x forward earnings expected to grow by 10% y/y. On other metrics it trades at 42x EV/EBITDA, 7x EV/Sales and with FCF yield of just 3.2%.

Chart is setting up for breakdown and like owning November 43 puts for $2.70 into earnings.

FTNT Chart


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