Fortinet's Billings Strength Fails to Resolve Service Durability Debate

What happened

Fortinet delivered 13% sales growth in a transitional year, with Unified SASE revenue expanding 40% and margins holding firm, per a Seeking Alpha article that frames this as preparation for future acceleration. However, the DeepValue master report reveals that this billings momentum masks a critical disconnect: service revenue guidance for FY2026 implies only 11% growth, lagging product performance and raising questions about conversion. Key filings show short-term deferred revenue growth has slowed, with 70% of 2024 service revenue recognized from pre-existing deferred balances, undermining the narrative of durable demand-led growth. While working capital improved and free cash flow per share rose 19.6%, service gross margin faces pressure from cloud infrastructure costs tied to SASE scale, challenging profitability targets. Investors must now watch for acceleration in short-term deferred revenue and next-12-month RPO, currently at $3.46B and ~$3.49B respectively, to validate management's claim of a second-half 2026 services rebound.

Implication

The stock trades at rich multiples (P/E 35.0, EV/EBITDA 27.01) that price in durable growth, but FY2026 service revenue guidance of 11% YoY suggests a structural lag versus billings, risking multiple compression if not addressed. Unified SASE growth at 40% YoY is positive but must drive higher deferred revenue and RPO to secure future earnings, as current metrics indicate slowing conversion capacity. Margin pressures from cloud costs for SASE delivery could squeeze operating margins below the 33–36% target, especially if inventory commitments of $732.5M lead to reserve charges and free cash flow volatility. Investors should adopt a wait-and-see approach, monitoring Q1'26 billings versus the $1.77B–$1.87B guide and SASE mix above 27% for signs of improvement. Entry near $78 offers better risk-reward, but any position requires confirmation that short-term deferred revenue and RPO accelerate through early 2026 to avoid capital impairment from a renewals or pricing issue.

Thesis delta

The new article adds no material shift to the investment thesis, as it echoes management's optimistic framing without addressing the deferred revenue and RPO concerns highlighted in filings. The core thesis remains unchanged: Fortinet must demonstrate that billings growth converts into service revenue acceleration, with near-term focus on deferred revenue metrics to confirm timing versus structural issues. Until such proof emerges, the 'WAIT' rating is justified, as the stock's valuation already reflects bullish assumptions vulnerable to disappointment.