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Fortinet's Momentum Challenged

Tickers in this article: CSCO CHKP FTNT PANW
NEW YORK ( TheStreet) -- Every now and then growth investors come to a point when they have to make certain critical decisions about a stock. None is more important than when they realize that the momentum needed to keep a growth story going is starting to evaporate.

One such example is security giant Fortinet(FTNT) . While the company can go a few more quarters producing above-average growth, I worry that too much of its valuation assumes competition will just roll over and concede the market. However, its most recent quarter suggests otherwise.

The Quarter That Was

For the period ending in September, the company reported net income of $17.2 million, or 10 cents a share on revenue of $136.3 million. While revenue rose 17% year over year and in line with consensus estimates, deferred revenue soared to $340 million -- improving by 24% from the same period a year ago. Though profits arrived below estimates, on a non-GAAP basis net income arrived in line with estimates of 14 cents per share -- up from 13 cents year over year.

The company also reported higher sales and marketing expenses, which grew by almost $8 million. Likewise research and development expenses grew by almost $4 million. As a consequence, Fortinet's margins took a slight hit. Gross margins shed 100 basis points year over year, while the company also saw its operating income decline by 1.5%. Nonetheless, that the company produced 17% growth in revenue can offset of lot of uneasiness, especially considering the tough macro climate.

But investors didn't see it this way.

The stock has lost over 20% since announcement. The company's weak guidance might have had a lot to do with investor concerns. For the fourth quarter, the company said it expects revenue to come in the range of $142 million to $146 million -- below analyst's estimates of $146 million. Likewise, net income forecast of 15 cents was shy of consensus by a penny.

For the full fiscal year, management sees profits of 51 cents per share on a revenue range of $524 million to $528 million. Profit expectations were a penny below estimates and similarly, the top of the range of the revenue guidance was $600,000 short of analysts' expectations.

It is possible Fortinet is expecting competition to ramp up or that the company is being overly conservative. I think it's a combination of both.

Moving Forward

As noted in the opening, Fortinet's valuation implies the company is just going to run away with the security market. But management's guidance implies a different thought process.

What's more, with its sales and marketing expenses growing, it seems the company is starting the feel the effects of increased competition from rivals such as market leaders Cisco(CSCO) and Check Point (CHKP) .