Palo Alto Networks stock has soared since the release of its fourth-quarter earnings report on Monday, entering Friday’s session up nearly 17% since Aug. 5, compared with a gain of about 7% for the S&P 500. Translation: Investor expectations for the cybersecurity leader are high. Will the company beat Wall Street estimates again this quarter — revenue of $2.16 billion and earnings per share of $1.41 per share, according to LSEG — and raise its guidance? That’s what we hope. But given the stock’s big move since we bought it on Aug. 2 for about $303 per share, we downgraded Palo Alto to our hold equivalent rating on Friday and plan a small sale on Monday. (We are currently prohibited from trading the stock.) This short-term adjustment in our thinking doesn’t change our belief that cybersecurity is a significant growth market in the years ahead and Palo Alto Networks is the best way to invest in the theme. It’s simply a move out of discipline in case the stock gets a dent from the report. “If it gets a dent, we’ll look to buy it back because the story is still good long-term,” Jeff Marks, director of portfolio analysis, said Friday. Beyond the headlines, here are three other factors to watch when Palo Alto reports after the market closes on Monday. 1. Is the new sales strategy working? Palo Alto lowered its full-year 2024 revenue and billing forecast when it released quarterly results in February because the company has moved to “platformization,” or bundling its products and services. That’s because the company initially had to give away certain products for free or at a discount while customers tested consolidated offerings. Palo Alto shares plunged 28% in the session following the Feb. 20 release. To us and CEO Nikesh Arora, this is all short-term pain for long-term gain as Palo Alto tries to gain more share in the competitive market and become a one-stop shop for cybersecurity needs. “What matters to me is whether we see results from this strategy of selling platforms, called platformization, which CEO Nikesh Arora said could attract some new customers looking for a return on investment,” Jim Cramer said during the monthly meeting on Wednesday. He added the stock could “see a big bounce if the comprehensive offering they have produces anything positive.” Wells Fargo agrees: In a note to clients Thursday, analysts said the total number of platformization customers will be the “key indicator” to show whether the strategy is working. Palo Alto said in its May quarterly earnings call that it had 900 platformization customers, up from 835 customers in the previous quarter. Evercore ISI, on the other hand, said Thursday that it saw “increased pressure” for discounts in the quarter and claimed Palo Alto’s platformization strategy received “mixed feedback,” citing its quarterly partner survey. This led analysts to be more cautious on the stock until Monday’s earnings release, but reiterated their long-term belief that Palo Alto is the “dominant cyber vendor.” PANW YTD Mountain Palo Alto Networks (PANW) Year-to-date Performance 2. How’s cybersecurity spending? Despite concerns about cybersecurity spending in a slowing economy, recent quarterly results from firewall rivals like Fortinet and Check Point Software show spending has remained steady. Analysts at Barclays, for example, cited strong results from both companies as a positive for Palo Alto’s upcoming quarter. Continued spending will be positive for Palo Alto’s revenue as the company continues to be a leading player in cybersecurity. In fact, it was the first company in the industry to reach a $100 billion market cap in December 2023. “We think (Check Point Software’s) results bode well for the firewall market, with healthy activity in large deals in the quarter, strong new business and increasing demand for firewall devices,” the analysts wrote in an Aug. 9 note to clients. “(Fortinet) also performed better in Q2 as hardware returned to more normal seasonality and the software portion of the product line saw healthy growth, resulting in a product surplus.” As for other competitors, the case for companies to give Palo Alto their business is getting stronger. A faulty update from cybersecurity firm CrowdStrike caused one of the largest global IT outages in history last month, disrupting operations at companies from banks to airlines. We don’t think all CrowdStrike customers are jumping ship, but the unfortunate situation has definitely made Palo Alto more attractive to those still undecided and presents an opportunity for sales reps. 3. Has RPO increased? Investors should recognize the importance of Palo Alto’s residual performance obligation (RPO) metric rather than focusing solely on billings growth. RPO represents the total value contracted during the quarter, while billings measure the amounts actually billed. Arora has increasingly placed emphasis on RPO, which showed sequential acceleration last quarter. However, billings slowed over the period, putting pressure on shares after the release of third-quarter results. RPO can provide additional insight into future profitability because it takes into account backlog and deferred revenue. Both RPO and billings should be considered. The market will be especially eager to hear management’s guidance for the current quarter and the rest of the year. We will be closely monitoring stock performance following the earnings call. If shares fall significantly, we will consider another buy due to consistent demand for cybersecurity offerings. In two of the past three quarters, we bought more shares following post-earnings release declines. We also told members that the May decline was a buying opportunity. (Jim Cramer’s Charitable Trust is long PANW. A full list of stocks can be found here.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. After sending a trade alert, Jim waits 45 minutes before buying or selling a stock from his Charitable Trust’s portfolio. When Jim has discussed a stock on TV, he waits 72 hours after the trade alert is issued before executing the trade. THE INVESTING CLUB INFORMATION MENTIONED ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY AND OUR DISCLAIMER. 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Palo Alto Networks’ booth on the third day of Mobile World Congress, the telecommunications industry’s largest annual gathering, to be held at Fira de Barcelona in Barcelona, Spain, on March 1, 2023.
Chris Jung | Nurphoto |
Palo Alto Networks The stock has been on a tear since Monday’s fourth-quarter earnings report and was up nearly 17% since August 5 as of Friday’s session, compared to about 7% gain for the S&P500. Translation: Investors’ expectations for the cybersecurity leader are high.
