Palo Alto Networks (NASDAQ:PANW) specializes in threat detection, but now there are threats detected in the company’s commentary about the cybersecurity market. Therefore, even though Palo Alto Networks just managed to pull off a bottom-line Street beat, I am neutral on PANW stock.
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Headquartered in California, Palo Alto Networks provides cybersecurity software. Like many other technology-focused businesses, Palo Alto Networks emphasized its products’ artificial intelligence (AI) features. This helped to send the Palo Alto Networks share price significantly higher during the past year.
PANW stock is crashing today, though, and it’s understandable if people want to know exactly what’s going on. The news isn’t all bad, but Palo Alto Networks’ management delivered a cautionary remark that should make prospective investors think twice.
A “Strong and Unique Position” for Palo Alto Networks
“Our leadership across all of our three platforms and growing cross-platform adoption puts us in a strong and unique position,” Palo Alto Networks CEO Nikesh Arora recently declared. This quote is taken from Palo Alto Networks’ quarterly press release, in which Arora made sure to emphasize the company’s “AI leadership strategy.”
So, is Palo Alto Networks really in a “strong and unique position”? We can cherry-pick some data points to support this contention. For example, in the second quarter of Fiscal Year 2024, Palo Alto Networks grew its revenue by 19% year-over-year to $1.975 billion. That’s nothing to sneeze at, and this result beat the consensus estimate by $10 million.
Furthermore, Palo Alto Networks posted a bottom-line beat with Q2-FY2024 non-GAAP net income of $0.5 billion, or $1.46 per diluted share. This shows improvement over the net income of $0.3 billion, or $1.05 per diluted share, that Palo Alto Networks reported in the year-earlier quarter.
Plus, this result surpassed Wall Street’s consensus earnings estimate of $1.30 per share. It’s another win for Palo Alto Networks, which has an excellent track record of beating analysts’ quarterly EPS estimates.
In light of these results, maybe Palo Alto Networks is indeed in a “strong and unique position.” On the other hand, the market is forward-looking and wants to know whether Palo Alto Networks’ management is confident about the future. So, let’s move on to the company’s forward guidance, along with a remark that might startle you.
Palo Alto Networks Faces “Spending Fatigue”
Not all of Arora’s comments were as confident as the aforementioned “strong and unique position” remark. In actuality, Arora might not be as confident as some investors would want him to be.
In a conference call, Arora observed, “We’re beginning to notice customers are facing spending fatigue in cybersecurity.” The CEO also noticed Palo Alto Networks’ customers asking themselves, “How do I spend less on the services that I have to deploy?”
Along with Arora’s troubling remarks, Palo Alto Networks issued forward guidance that some investors won’t want to hear. For the current quarter, Palo Alto Networks anticipates revenue of $1.95 billion to $1.98 billion, which comes up short when compared to the $2.04 billion that Wall Street had forecast.
Additionally, Palo Alto Networks’ management guided for current-quarter adjusted EPS in the ranges of $1.24 to $1.26. Again, there’s a shortfall here, as analysts wanted to see adjusted EPS of $1.30.
Moreover, the full year could be hampered by “spending fatigue.” For Fiscal Year 2024, guided for Palo Alto Networks of $7.95 billion to $8 billion. On the other hand, the consensus estimate called for full-year revenue of $8.19 billion.
So, what do analysts think about Palo Alto Networks? We’ll get to the consensus opinion in a moment, but at least one analyst appears to be concerned about Palo Alto Networks.
In particular, Piper Sandler downgraded PANW stock from Overweight to Neutral and cut its price target on the shares from $350 to $300. Piper Sandler pointed out that, for the third consecutive quarter, Palo Alto Networks’ results “are creating a large degree of investor consternation.” There’s no denying that this is true, as Palo Alto Networks stock is down 28% today.
Is PANW Stock a Buy, According to Analysts?
On TipRanks, PANW comes in as a Strong Buy based on 26 Buys and three Hold ratings assigned by analysts in the past three months. The average Palo Alto Networks stock price target is $391.82, implying 49% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell PANW stock, the most accurate analyst covering the stock (on a one-year timeframe) is Patrick Colville of Scotiabank, with an average return of 40.51% per rating and a 94% success rate. Click on the image below to learn more.
Conclusion: Should You Consider PANW Stock?
Is there an irresistible bargain now that investors are dumping their Palo Alto Networks shares? Not necessarily, as Palo Alto Networks’ decent quarterly results are being overshadowed by the company’s cautious forward guidance and the CEO’s “spending fatigue” remark.
Since Palo Alto Networks’ management doesn’t seem entirely confident, then investors shouldn’t be too bullish right now. Therefore, I feel that this isn’t the ideal time to consider a share position in PANW stock.
