Palo Alto Networks Inc. shares have experienced a significant rise over the past two weeks, driven by strong performances from cybersecurity peers and a broader market rebound.
TakeAway Points:
- Palo Alto Networks’ stock has increased 14%, driven by the encouraging updates from Check Point Software and Fortinet.
- It is predicted that revenue will reach $2.2 billion in Q4, which will be the fourth consecutive quarter of declining growth. Billings are projected to reach $3.5 billion.
- Forecasts vary among analysts; the platformization plan and the effect of CrowdStrike’s outage on the next earnings report are of particular importance.
Palo Alto Networks stock increase
The stock has increased by 14% since August 5, partly due to positive updates from Fortinet Inc. and Check Point Software Technologies Ltd. Despite this surge, Palo Alto Networks’ shares remain below their all-time high from January, following a revenue forecast cut in February that raised concerns about potential user cutbacks. The market is also evaluating the company’s shift to a “platformization” strategy, which focusses on bundling services. Palo Alto Networks is set to report its earnings on Monday after the close of trading.
Jamie Meyers, a senior equities analyst at Laffer Tengler Investments, commented on the strategy, stating, “We think that for the long run it’s a smart strategy,” but noted that in the short term, “the problem is that Wall Street doesn’t necessarily appreciate it.” Meyers emphasized the importance of large deals and progress in platformized customer numbers in the upcoming earnings report. Additionally, investors are keen to hear from Palo Alto executives about the impact of CrowdStrike Holdings Inc.’s July outage, which caused a global IT meltdown and may have led to customer churn.
Analyst perspectives and financial expectations
Revenue for Palo Alto Networks’ fourth quarter is expected to be around $2.2 billion, an 11% increase from the same period last year. However, this would mark the fourth consecutive quarter of slowing growth. Billings are anticipated to be approximately $3.5 billion, up about 10% year-over-year. Analysts are divided on the company’s forecasts, especially after the February revenue guidance cut that led to a record stock drop.
Irene Tunkel, chief US equity strategist at BCA Research Inc., highlighted the importance of Palo Alto’s performance, stating, “Palo Alto is unique because it had pretty bad results before, so it’s important for them to impress investors.” She also pointed out the uncertainty regarding the company’s competitive moat against larger technology companies that might bring cybersecurity in-house.
Wall Street remains generally optimistic about Palo Alto Networks, with 40 buy ratings, 15 hold ratings, and no sell ratings among analysts tracked by Bloomberg. However, JPMorgan analysts led by Brian Essex noted potential limitations for share-price gains due to headwinds in billings, revenue, and free cash flow.
“Deceleration of those metrics could limit earnings-driven upside at current valuation levels as investors evaluate the potential for sustainable FCF growth.” they wrote.
Changes in strategy and market responses
Palo Alto Networks’ shift to a platformization strategy is seen as a potential “clearing event” for resetting numbers, according to Evercore ISI analysts led by Peter Levine. This could offer a better buying opportunity post-earnings. The company’s ability to provide solid future projections and capitalize on the CrowdStrike fallout could positively influence investor sentiment.
Stifel analysts led by Adam Borg expressed curiosity about whether Palo Alto’s initial guidance would be sufficient to boost shares, despite some less-favourable near-term dynamics. Borg remains bullish on the stock, reflecting a broader sentiment among analysts who are watching closely for signs of sustainable growth and competitive positioning.
