Key Highlights

● Fortinet plunged to $139.10 on October 29 despite beating headline estimates.

● Service Revenue of $1.313 billion grew more slowly than analysts expected.

● The company cut its full-year service revenue forecast to $5.15 billion to $5.17 billion.

● A brokerage downgraded the stock to Neutral with a $140 price target.

Fortinet (NASDAQ:FTNT)'s slowing service growth and a cut to its forecast triggered a steep selloff on Thursday, and a downgrade from a brokerage added to the pain.

A beat that did not count

Fortinet's third-quarter report, released after the close on Wednesday, beat headline estimates. It did not matter. By the close on October 29, Fortinet had plunged to $139.10, according to market data, one of the steepest declines in both the Nasdaq-100 and the S&P 500.

The Cybersecurity company, which sells firewalls and network security hardware alongside subscription services, saw its shares slide even before Thursday's session, falling sharply in extended trading on Wednesday evening.

The service-revenue problem

The trouble lay beneath the headline. Product revenue rose to $765 million, but its growth slowed markedly from the prior quarter. Service revenue of $1.313 billion grew more slowly than analysts had expected, and the non-GAAP gross Margin narrowed.

Most important, Fortinet cut its full-year service revenue forecast to a range of $5.15 billion to $5.17 billion, even as it raised its overall sales outlook. Service revenue, which includes subscriptions and support contracts, is prized by investors because it recurs year after year. Investors read the cut as a sign that one of the most predictable parts of the Business is cooling.

Analysts pile on

Wall Street's reaction compounded the damage. One brokerage downgraded Fortinet to Neutral and set a $140 price target, according to market data. Three other brokerages trimmed their targets.

Sources differed on how to frame the selloff. One report described it partly as a "sell the news" move combined with the brokerage downgrade, while others emphasized the slowing product growth and the service guidance cut.

A sector-wide shockwave

Fortinet's report reverberated across cybersecurity. Zscaler (NASDAQ:ZS) opened sharply lower before paring losses, and Palo Alto Networks (NASDAQ:PANW) and CrowdStrike (NASDAQ:CRWD) both fell sharply early, according to market commentary. The software ETF IGV sank as Fortinet's slide combined with ServiceNow (NYSE:NOW)'s record one-day drop, which left that stock at $109.67.

Market commentary pointed to worries about disruption from artificial intelligence as a Factor in the wider software selloff, and slowing growth at established vendors feeds that anxiety.

A tough day for tech

The broader tech sector was already reeling. Alphabet (NASDAQ:GOOGL) suffered its worst day since its 2004 IPO, erasing about $500 billion in market value, after results that media reports said "reignited concerns over mounting AI costs." The Nasdaq Composite tumbled 365.13 points to 26,184.72, and the Nasdaq-100 fell to 29,402.51.

The rest of the market proved more resilient. More than 400 S&P 500 members rose, and the Russell 2000 gained 28.71 points to 2,859.22. Health care, real estate and utilities led as investors rotated out of technology.

"There's plenty of other places to go with your money outside of the AI trade that have pretty decent prospects," one market strategist said.

Economic data added a hawkish tilt, with third-quarter GDP growing faster than expected and September PCE Inflation running hot. Traders continued to lean toward a December rate hike from the Federal Reserve.

What to watch

The key question is whether Fortinet's service slowdown is temporary or the start of a longer trend. Investors will look for more detail from management on renewals, pricing and Demand for its subscription services.

The stock closed just below the brokerage's $140 target. Upcoming reports from cybersecurity peers will show whether Fortinet's problems are shared. On the macro side, Friday's Employment Cost index and the Fed's December 8 to 9 meeting loom over richly valued software stocks.