Fortinet's Stock Plunge Contrasts with Record Cash Flow, Underscoring Unresolved Growth Durability

What happened

Fortinet's stock has fallen 28% year-to-date to $77, despite reporting a record $2.21 billion in free cash flow for FY2025, highlighting a disconnect between operational cash generation and investor sentiment. The DeepValue master report reveals that this optimism is tempered by critical issues: 70% of 2024 service revenue was recognized from deferred revenue already on the balance sheet, and management expects service revenue growth to slow due to declining short-term deferred revenue growth. While unified SASE billings grew 40% year-over-year in Q4'25 and now comprise 27% of total billings, FY2026 service revenue guidance of ~11% YoY remains subdued, failing to align with strong headline billings. At $77, the stock approaches the report's attractive entry point of $78, but valuation remains elevated at ~35x P/E, offering limited margin of safety amid concerns over service gross margin pressure from cloud infrastructure costs. Investors should therefore focus on near-term catalysts, such as acceleration in short-term deferred revenue and next-12-month RPO, to confirm the promised service revenue rebound in the second half of 2026.

Implication

Fortinet's record free cash flow demonstrates operational strength, but the stock's decline signals deeper market skepticism about the durability of service revenue growth amidst slowing deferred revenue indicators. The company must prove that its SASE expansion can drive sustained service revenue without eroding margins, requiring close monitoring of Q1'26 billings versus the $1.77B–$1.87B guide and SASE mix rising from 27%. Until short-term deferred revenue and next-12-month RPO show sequential improvement, the investment thesis remains unproven, and the stock could face further downside toward the bear case of $70 if conversion metrics weaken. Cash flow supports buybacks and balance sheet flexibility, but these alone are insufficient to offset potential multiple compression if services lag persists. Patience is key, with entry only justified upon visible signs of revenue durability, aligning with the report's 'WAIT' rating and 6-12 month re-assessment window.

Thesis delta

The new article reinforces the DeepValue report's emphasis on strong cash flow but does not alter the core thesis, which remains centered on unproven services durability. The stock price drop to $77 brings it near the attractive entry level of $78, but this alone is insufficient to upgrade the rating without evidence of improving deferred revenue or RPO metrics. Thus, the investment call stays 'WAIT,' with the thesis unchanged pending clearer conversion signals in upcoming quarters.