Usually, when a publicly-traded enterprise suffers a single-day catastrophic loss – such as what happened to cybersecurity specialist Fortinet (NASDAQ:FTNT) on Friday – conventional wisdom suggests you should stay away. In many, if not most cases, bad news can lead to even worse outcomes. However, bullish-leaning unusual options activity suggests that Fortinet could be worth a look for intrepid speculators. Nevertheless, I am neutral on FTNT stock.
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Disappointing Outlook Craters FTNT Stock
Over the long run, Fortinet seems an extraordinarily relevant market idea. While so much attention centers on innovative technologies such as artificial intelligence (AI), such advancements don’t occur in a vacuum. Sadly, elements of human society will always seek to take advantage of developments in conveniences and efficiencies for nefarious purposes. Thus, FTNT stock enjoys a baseline level of pertinence.
However, no company is immune to the consequences of failing to live up to expectations. As TipRanks reporter Vince Condarcuri stated recently, Fortinet “sent shockwaves through the market by lowering its full-year sales outlook, causing its stock to plummet more than 14% in extended trading hours. The company now projects sales to land somewhere between $5.35B and $5.45B, a reduction from previous estimates.”
To be fair, not everything about the company’s second-quarter earnings results featured pessimistic undertones. Mainly, the company posted earnings per share (EPS) of 38 cents, beating the consensus target of 34 cents. Also, Condarcuri stated that “full-year adjusted earnings are looking promising, too, with expectations falling between $1.49 and $1.53 per share, beating the earlier estimate of $1.47.”
TipRanks contributor Steve Anderson carried the same tone regarding FTNT stock. The forward outlook itself wasn’t catastrophic. However, the reasons for the downgrade imply wider concerns. “Businesses, sensing recession and likely economic trouble ahead, are pulling back on expenses, and that includes things like updating cybersecurity systems that may have only been updated recently,” Anderson stated.
Options Traders Sense Opportunity with Fortinet
Despite the worries over FTNT stock in the open market, sentiment in the derivatives market presented a picture of contrast. Compiling all transactional data for the August 4 session, Fortinet represented one of the highlights regarding unusual stock options volume. Specifically, total volume hit 113,273 contracts against open interest of 126,675.
Beyond the spiked activity in the options arena – where the difference between FTNT’s Friday session volume and its trailing one-month average volume out to 896.42% – bullish trades appeared more prominent, with call volume reaching 73,965 contracts versus put volume of 39,308 contracts.
In particular, the most unusual activity under the context of FTNT’s volume-to-open-interest ratio was for $59 strike price call options with an expiration date of August 11, 2023. Here, the ratio pinged at 1,148x. Keep in mind that today, FTNT stock closed at $57.70, meaning that shares must rise by 2.25% at minimum to break even, not including transactional costs.
However, options traders also acquired longer-expiry contracts as well. Specifically, the $60 calls with an expiration date of October 20, 2023, saw a volume-to-open-interest ratio of 289x. Interestingly, the bid-ask spread, represented by the midpoint price ($2.65), reached about 7.55%. For the aforementioned $59 call, the spread came out to 15.38%, suggesting that fewer market participants are trading this particular product.
Unsurprisingly, on the technical analysis front, the overall assessment from oscillators and moving averages print as bearish. However, it’s also possible that, at minimum, a heavily-followed tech play like FTNT stock could benefit from a reactionary rally, even if it’s only a dead-cat bounce. Under this context, it’s not terribly unusual to see heightened options activity.
Fundamentals May Win the Day
To be sure, the reasons that Anderson stated about the dark cloud over FTNT stock – in particular, companies cutting back on expenditures, including cybersecurity solutions – impose a daunting picture. Certainly, acquiring Fortinet at this juncture isn’t a trade for everyone. Still, the fundamentals may ultimately win the day.
According to various sources, cybercrimes continue to escalate and impose significant costs on businesses, private institutions, and individuals. Per one report, the global cost of cyberattacks may hit $10.5 trillion annually by 2025. Arguably even more alarming, the cost of a data breach for a small business can range from $120,000 to $1.24 million.
In other words, going without comprehensive net security is akin to driving without insurance. At some point, playing the odds may catch up to you. Hence, FTNT stock offers a relevant albeit speculative argument.
Is FTNT Stock a Buy, According to Analysts?
Turning to Wall Street, FTNT stock has a Strong Buy consensus rating based on 16 Buys, four Holds, and zero Sell ratings. The average FTNT stock price target is $78.21, implying 35.55% upside potential.
The Takeaway: FTNT Stock Offers an Aggressive but Somewhat Sensible Wager
Undeniably, the severe decline of FTNT stock following Fortinet’s contextually disappointing Q2 earnings report warrants caution. At the same time, rumblings in the options market suggest that some traders anticipate a bounce back, however brief. Further, the fundamentals suggest that those who take this bet aren’t completely reckless.
