Palo Alto Networks bet big on bundling. Investors want more proof that it’s working
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Palo Alto Networks stock has been on a tear into Monday’s fourth-quarter earnings report, entering Friday’s session up nearly 17% since Aug. 5 compared to a roughly 7% gain for the S & P 500 . Translation: Investor expectations of the cybersecurity leader are high. Is this the quarter the company gets back to beating Wall Street estimates — revenues of $2.16 billion and earnings per share of $1.41, per LSEG — and raising its guidance? We sure hope so. But considering the stock’s big move since we bought more around $303 a share Aug. 2, we downgraded Palo Alto on Friday to our hold-equivalent rating and plan to make a small sale Monday. (We’re currently restricted from trading it.) This short-term adjustment to our thinking does not change our belief that cybersecurity is a significant growth market for years to come, and Palo Alto Networks is the best way to invest in that theme. It’s simply a move made out of discipline in case the stock gets dinged on the report. “If it gets hit, we will look to buy it back because the story is still good long term,” Director of Portfolio Analysis Jeff Marks said Friday. In addition to the headline numbers, here are three other factors to keep in mind when Palo Alto reports after Monday’s market close. 1. Is the new sales strategy working? Palo Alto cut its 2024 full-year guidance for revenue and billings during quarterly results in February because of its pivot to “platformization,” or bundling its products and services. That’s because it required the company to initially give out certain products for free or at a discount while customers tested out consolidated offerings. Shares of Palo Alto nosedived 28% in the session following the Feb. 20 release. For us, and CEO Nikesh Arora, it’s all short-term pain for long-term gain as Palo Alto looks to grab more share in the competitive market and become a one-stop shop for cybersecurity needs. “What matters to me is, can we see some results from this policy of seeking to sell platforms, the so-called platformization that CEO Nikesh Arora said can snag some new clients looking for a return on investment,” Jim Cramer said during the Monthly Meeting on Wednesday. He added that the stock could see “a big run if there is anything positive about the soup-to-nuts offering that they have.” Wells Fargo agrees: In a Thursday note to clients, analysts said the total number of platformization customers will be the “key measure” to show if the strategy is working. Palo Alto said it had 900 platformization customers in May’s quarterly earnings release, up from 835 customers in the prior quarter. On the other hand, Evercore ISI said Thursday that the quarter saw “increased pressure” on discounting and contended Palo Alto’s platformization strategy received “mixed feedback,” citing its quarterly partner survey. That prompted analysts to take a more cautious view on the stock into Monday’s earnings release, but they 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. What’s the state of cybersecurity spending? Despite concerns about cybersecurity spending in a slowing economy, recent quarterly earnings from firewall peers like Fortinet and Check Point Software show that spending has held up. Barclays analysts, for example, cited strong results for both as a positive read-through for Palo Alto’s upcoming quarter. Continued spending will be a boon for Palo Alto’s sales as the company remains a leading player in the cybersecurity space. In fact, it was the first in the industry to hit a $100 billion market capitalization back in December 2023. “We think [Check Point Software] results read well for the firewall market with healthy big deal activity in the quarter, strength in new business, and improving demand for firewall appliances,” the analysts wrote in an Aug. 9 note to clients. “[Fortinet] also performed better in 2Q as hardware returned to more normal seasonality and the software portion of the product line saw healthy growth, which drove a product beat.” As for other competitors, the case for companies to give Palo Alto their business just keeps getting stronger. A faulty update from fellow cybersecurity firm CrowdStrike last month caused one of the largest global IT outages in history, disrupting operations for companies ranging from banks to airlines. We don’t think CrowdStrike customers are all jumping ship, but the unfortunate situation definitely made Palo Alto look more attractive for those on the fence, and provides an opening for sales reps. 3. Is RPO up? Investors should recognize the importance of Palo Alto’s remaining performance obligation (RPO) metric, instead of solely focusing on billings growth. RPO represents the total value contracted during the quarter, whereas billings measures the dollars actually invoiced. Arora has increasingly placed an emphasis on RPO , which last quarter showed a sequential acceleration. Billings, however, slowed over the period, which pressured shares after the third-quarter earnings release. RPO can give additional insight on future profitability since it factors in backlog and deferred revenues. Both RPO and billings should be taken into consideration. The market will be especially keen to hear management’s guidance for the current quarter and rest of the year. We will closely monitor the stock action after the earnings conference call. If shares decline significantly, we will consider another buy because of consistent demand for cybersecurity offerings. In two of the three past quarters, we’ve bought more of the stock on post-earnings dips. We also told members the May pullback was a buying opportunity. (Jim Cramer’s Charitable Trust is long PANW. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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The Palo Alto Networks stand on day three of the Mobile World Congress the telecom industry’s biggest annual gathering at the Fira de Barcelona on March 01, 2023 in Barcelona, Spain.
Chris Jung | Nurphoto | Getty Images
Palo Alto Networks stock has been on a tear into Monday’s fourth-quarter earnings report, entering Friday’s session up nearly 17% since Aug. 5 compared to a roughly 7% gain for the S&P 500. Translation: Investor expectations of the cybersecurity leader are high.
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