Palo Alto Networks is making a comeback after a brutal February earnings selloff, and Wall Street analysts say the cybersecurity company's earnings next week will justify its rebound. Palo Alto shares fell 28% on February 21, a session after the company gave a more cautious forecast for the rest of 2024. The stock then swung around for more than a month until shares bottomed at $265 per share on April 4. At the top of investors' concerns: weakness in the US federal government market, along with the financial impact of the intensification of the “platform” strategy of bundling services and products. However, Palo Alto stock has since risen 13.2%, outperforming the iShares Cybersecurity and Tech ETF which fell 1.2% over the same period. There are three reasons why investor sentiment will continue to improve leading up to the May 20 earnings announcement and beyond, according to recent research notes from Barclays and Morgan Stanley. 1. History unlikely to repeat itself Sellers came out in full force after CEO Nikesh Arora announced a pivot to accelerate the “platform” during a conference call in February. The shift in business strategy requires Palo Alto to offer customers its new services and products for free to demonstrate their many benefits. This, in turn, will impact billings and revenue growth over the next 12 to 18 months. Palo Alto argued that near-term headwinds will pay off in the future with larger deals as clients look for a one-stop shop for their cybersecurity offerings. The company in February lowered its overall fiscal 2024 billings guidance to a range of $10.1 billion to $10.2 billion. Advance guidance was $10.7 billion to $10.8 billion. Its new forecast was lower than Wall Street analysts' estimates of $10.74 billion. Meanwhile, Palo Alto provided an overall revenue forecast of $7.95 billion to $8 billion for fiscal 2024, lower than the company's previous guidance of $8.15 to $8.2 billion. Analysts' expectations were also $8.19 billion. But Barclays analysts said these discounted offers should not affect the company's financial performance for three months. “This is the first quarter in which PANW is expanding its free trials (and) platform strategy, but we have not captured any meaningful changes (go-to-market strategy) in our scans yet, so the billing headwinds from free trials may be smaller than expected,” the analysts wrote in a note dated May 7. Additionally, since management has already lowered Palo Alto Network's guidance for the rest of 2024, analysts say billing estimates for upcoming printing have been thrown out the window. This means that the numbers were so conservative in the last quarter that investors believe the odds of a further decline are low. Not only will this circumvent another big drop in the share price following the results, but it gives management plenty of room to beat expectations. During Palo Alto's post-earnings call, we're excited to learn more about how Arora's bet on platforms will play out, including more clarity on when the company will benefit from the new strategy. We'd also like to learn more about how customers respond to free trials and update the adoption rate of Palo Alto's more integrated offerings. Mountain Palo Alto Networks' (PANW) Year-to-Date PANW Performance 2. Palo Alto's Market Share Is Growing Although it's been a volatile year for Palo Alto stock, the company has been busy grabbing more market share, according to analysts. “PANW continues to gain share across multiple security classes, as companies embrace the broader platform,” Morgan Stanley analysts wrote. Meanwhile, Barclays said: “Platforming is happening, but not because of free trials – just because of good cross-selling and competitiveness.” Palo Alto Networks has nabbed a series of big deals. Our favorite cybersecurity name and portfolio stock was tapped to help UnitedHealth Group's Change Healthcare, after a massive attack in February that caused massive disruptions throughout the US healthcare system. In a recent interview with CEO Arora, Jim Cramer said Change Healthcare “brought (Palo Alto) in because they understood how to fix it,” praising the company for its track record of delivering effective cybersecurity solutions over its competitors. Arora has long said that Palo Alto's move to platforms will ensure its leadership among its peers as the industry consolidates spending. “If you have 10, 20, 30 cybersecurity vendors spread across your infrastructure, you need data from all of them,” CEO Arora said on “Mad Money” last week. “You have to be able to analyze it quickly.” The club took a similarly optimistic stance when shareholders sold shares in panic after earnings. We've held to the view that the short-term pain is worth the long-term gain, and have even bought Palo Alto shares twice since Q2 earnings on weakness. 3. The right time to be a cybersecurity leader Finally, analysts love the backdrop of the cybersecurity sector. Demand for industry offerings remains high as companies increasingly face more threats from bad actors. We've seen this amid a slew of high-profile security incidents in 2024. In addition to Change Healthcare, Club Holding Microsoft also revealed in January that hackers targeted employee email accounts, including those of senior executives. Other major companies, such as cleaning supplies distributor Clorox, Vans owner VF Corp, and casino operator Caesars Entertainment, have disclosed attacks in the past year. Morgan Stanley analysts said their latest surveys point to “permanent security demand, despite concerns about spending fatigue in the fourth quarter.” “Cybersecurity remains a relative bright spot as rising threats and new regulatory requirements drive a greater priority at the executive level,” Morgan Stanley analysts wrote, pointing to stricter disclosure rules imposed by the Securities and Exchange Commission on publicly traded U.S. companies. US federal spending looks better than it did last quarter as well, which has led to broadly improved demand for cybersecurity offerings, Barclays said, citing peer comments. For example, the previously defensible administration issued upbeat notes on spending during a May 1 conference call, with CFO Steven Fentz calling the federal pipeline “strong.” For its part, Palo Alto said that the company had several projects with the federal government that were not closed in the previous quarter. “Overall, we feel good about the third-quarter setting on billings, (annual recurring revenue), and (free cash flow), based on the tape, our checks, and activity in the US Fed market — we continue to believe PANW needs to,” he wrote. Barclays analysts: “Rebuild investor confidence with at least another quarter of flat performance, but we think this third quarter could start that process.” Company Offers: “I'm a big believer in Palo Alto because the demand for cyber protection is endless, especially now that hackers have access to artificial intelligence and this company has the most comprehensive suite of solutions available,” Jim said last week Cramer's Charitable Trust Long PANW, MSFT See here for complete list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim takes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock In the wallet of his charitable fund. If Jim talks about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. The above Investment Club information is subject to our Terms and Conditions and Privacy Policy, as well as our Disclaimer. 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Palo Alto Networks It's making its way back after a brutal earnings sell-off in February, and Wall Street analysts say the cybersecurity company's earnings next week will justify its rebound.
