Palo Alto Networks lowers guidance, lowers price targets

Palo Alto Networks NASDAQ: PANW has shifted significantly, causing the entire cybersecurity universe to shift downward. The movement is towards the platform. The goal is to attract more business in the long term by consolidating existing services and products into one signal platform and luring them with freebies. Already a leader in the cybersecurity market, Palo Alto Networks wants to ensure it maintains its position.

However, the impact of the news is far-reaching. Shares of Palo Alto and other cybersecurity leaders have fallen by double digits and are likely to stay down for the foreseeable future.

The reason for the stock price implosion is revenue and earnings. The impact on Palo Alto will last twelve to eighteen months and will reduce this year’s expected billings by 5.6%. The impact on the industry is the need to offset the market share losses that Palo Alto Network’s move could cause, potentially resulting in a significant decline in revenue and earnings expectations for all IT stocks.

Analyst sentiment changes for Palo Alto Networks

Analysts have backed Palo Alto Networks, but sentiment is changing as the business changes. While some spoke out to defend the move and the stock’s long-term prospects, others spoke out to downgrade their ratings or lower their price targets.

Among the most notable are downgrades to Hold from Buy or Outperform equivalents from Piper Sandler, Rosenblatt Securities and Loop Capital. The conclusion from their notes is that a high degree of uncertainty has come into play, that results will be hampered for the foreseeable future, and both raise issues with valuation and price multiples. Trading at 65X earnings, it is a highly valued stock that is seeing its growth slow and its prospects scale back.

Palo Alto Networks reported a solid quarter and reaffirms earnings guidance

Palo Alto Networks reported a solid second quarter, demonstrating strength across all three platforms. The company reported net revenue of $1.98 billion, an increase of 19.3% over last year. Revenue beat the Marketbeat.com consensus by a slim margin and is compounded by solid margins. At a segment level, Products grew 10.7%, led by a 21.6% increase in Services. Obligation to do remaining, an important indicator for revenue growth, increased by 22%.

Margin news is mixed, but gross margin improvement has offset rising costs to keep adjusted and GAAP earnings above forecast. Adjusted earnings grew 40% year over year to $1.46 per share, beating the consensus of $0.16. This strength should have led management to increase guidance, but the change in corporate strategy counterbalanced it.

The orientation is good, even if marred by uncertainty. The company reaffirmed its outlook for adjusted EPS, which has a midpoint slightly below the consensus estimate. The risk for investors that slowing organic growth will be exacerbated by the change in strategy, resulting in underperformance in the second half of the fiscal year.

Technical Outlook: Palo Alto Networks is going down

Palo Alto Networks’ business may not feel the impact the market fears, but that won’t help the stock price. The stock dropped more than 25% in a single day, creating a solid engulfing pattern that consumes two and a half months of trading. This signal creates a significant excess of investment dollars, which are now showing losses. A substantial change in market sentiment will be needed to overcome the glut, leading to deeper declines in the stock price. The next best target for solid support is near $230, or a further downside of about 15%.

The factor that will support the price is the budget. The company is in a strong financial position and can afford to invest in its future. Critical details at the end of the second quarter include a significant increase in cash, inventory, and current and total assets offsetting a slight increase in liabilities. The result is that the share capital has more than doubled.

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