Why Fortinet Stock Plunged More Than 20% Today

Fortinet (NASDAQ:FTNT) just raised its full-year forecast for the third time this year. The cybersecurity stock still tanked, plummeting 22% as of 2:30 p.m. ET Thursday to its lowest level in nearly five months.

Fortinet makes money in two ways. It sells physical and virtual network security products, notably its FortiGate firewalls, and then charges recurring fees for services and subscriptions to keep those firewalls secure.

It's a classic razor-and-blade model, where the company sells products at lower margins to get its gear onto customers' networks. Then it makes most of its profit on the subscriptions that follow.

Management now expects more revenue this year than it did three months ago. So why is the stock falling?

Image source: Getty Images.

Fortinet's Q3: the numbers you must know

The razors are in high demand. Product revenue jumped 37% year over year in the third quarter, as customers moved to higher-performing models at higher prices, and total revenue climbed 20%. Price hikes helped.

Billings rose 29% to $2.3 billion, reflecting strong future revenue potential.

The blades are the problem, or so the market thinks. Services made up over 65% of Fortinet's revenue and an even higher percentage of gross profits last year. That service revenue grew just 13% in Q3. Management also trimmed its full-year service revenue forecast. The cut was tiny, under 1% at the midpoint, but it was a cut nonetheless.

If you look at sequential growth, overall business cooled off. In Q2, revenue grew 26%, product revenue 52%, and billings 33%.

That leaves investors with an uncomfortable question: Are Fortinet's high-flying days over?

What this means for Fortinet stock

Fortinet shares had climbed 120% this year before earnings stalled the rally. Any sign of a cooling off was bound to hit the stock price.

Investors, perhaps, interpret the service guidance cut as a sign that enterprise spending, or customers moving onto Fortinet's platform, could slow next year. The fear rippled across the industry and pulled other cybersecurity stocks down as well.

Fortinet isn't the kind of company to write off based on one quarter. Management expects billings to grow about 28% this year and revenue about 20%. It also lifted its full-year earnings forecast and boosted its buyback program by $1.2 billion.

The next few quarters come down to one number: service revenue growth. If that starts accelerating again, the stock's drop will look like a blip. Miss again, and the market will stop giving management the benefit of the doubt.

Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Fortinet. The Motley Fool has a disclosure policy.