Palo Alto Networks stock was up sharply on Monday’s fourth-quarter earnings report, entering Friday’s session up about 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. Is this the quarter in which the company beats Wall Street estimates — $2.16 billion in revenue and $1.41 per LSEG EPS — and raises its guidance? We certainly hope so. But given the big move the stock has made since we bought the stock at over $303 a share on Aug. 2, we downgraded Palo Alto on Friday to a hold-equivalent rating and plan to make a small sale on Monday. (We’re currently restricted from trading it.) This short-term adjustment to our thinking doesn’t change our belief that cybersecurity is a major growth market for years to come, and that Palo Alto Networks is the best way to invest in it. It’s simply a move made out of discipline in case the stock takes a hit on the report. “If it does get impacted, we’ll look at buying it back because the story is still good in the long run,” Jeff Marks, director of portfolio analysis, said Friday. In addition to the headline numbers, here are three other factors to consider when Palo Alto reports after the market closes on Monday. 1. Is the new sales strategy working? Palo Alto lowered its full-year 2024 guidance for revenue and billings during its quarterly results in February due to its shift to “platforming,” or bundling, of its products and services. That’s because it required the company to initially offer certain products for free or at a discount while customers tested the bundled offerings. Palo Alto shares fell 28% in the session following the Feb. 20 release. For us, and CEO Nikesh Arora, all of this is short-term pain for long-term gain as Palo Alto looks to capture more market share in a competitive market and become a one-stop shop for cybersecurity needs. “What matters to me is, can we see some results from this strategy of seeking to sell platforms, which CEO Nikesh Arora said could attract some new customers looking for a return on investment,” Cramer said during the monthly meeting on Wednesday. He added that the stock could see “a significant upside if there’s anything positive about the overall offering that they have.” Wells Fargo agrees: In a note to clients on Thursday, analysts said the total number of platform customers will be the “key metric” to show whether the strategy is working. Palo Alto said it had 900 platform customers in its May quarterly earnings release, up from 835 in the previous quarter. Elsewhere, Evercore ISI said on Thursday that the quarter saw “increased pressure” on discounting and claimed that Palo Alto’s platform strategy received “mixed feedback,” citing its quarterly partner survey. That prompted analysts to take a more cautious view of the stock on Monday’s earnings release, but they reiterated their long-held belief that Palo Alto is the “dominant cyber vendor.” PANW YTD Mountain Palo Alto Networks (PANW) Year-to-date performance 2. How is cybersecurity spending doing? Despite concerns about cybersecurity spending amid a slowing economy, recent quarterly earnings from firewall peers like Fortinet and Check Point Software show that spending is holding up. For example, Barclays analysts cited strong results from both as a positive read for Palo Alto’s upcoming quarter. The continued spending will be a boon for Palo Alto’s sales as the company remains a leading player in cybersecurity. In fact, it was the first company in the industry to reach $100 billion in market cap in December 2023. “We believe Check Point Software’s results are good for the firewall market with healthy large deal activity in the quarter, strength in new business, and improving demand for firewall hardware,” the analysts wrote in a note to clients on Aug. 9. “Fortinet also performed better in the second quarter as hardware returned to more normal seasonality and the software portion of the product line saw healthy growth, pushing the product to outperform.” As for other competitors, the case for companies to give Palo Alto its business is growing stronger. A botched update from 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 all CrowdStrike customers are jumping ship, but the unfortunate situation has made Palo Alto look more attractive to those on the fence, and presents an opportunity for sales reps. 3. Has the ROI increased? Investors should be aware of the importance of Palo Alto’s remaining performance obligation (RPO) metric, rather than focusing solely on billings growth. RPO represents the total value contracted during the quarter, while billings measure the dollars actually billed. Arora has been increasingly focused on RPO, which showed sequential acceleration in the past quarter. However, Billings slowed during the period, weighing on the stock after the Q3 earnings release. RPO can provide additional insight into future profitability because it takes into account arrears and deferred revenue. Both RPO and billings should be considered. The market will be particularly keen to hear management’s guidance for the current quarter and the rest of the year. We will be watching the stock closely after the earnings conference call. If the stock declines significantly, we will consider another buy due to continued demand for cybersecurity offerings. In two of the past three quarters, we have bought more shares on post-earnings dips. We also told members that the May pullback was a buying opportunity. (Jim Cramer’s charitable trust is a long-term PANW mutual fund. See here for a full list of stocks.) As a subscriber to CNBC’s 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 portfolio. If Jim talks about a stock on CNBC, 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 is participating in the third day of Mobile World Congress, the largest annual gathering of the telecommunications industry at Fira de Barcelona on March 1, 2023 in Barcelona, Spain.
Chris Jung | Noor Photo | Getty Images
Palo Alto Networks The stock surged sharply on Monday's fourth-quarter earnings report, entering Friday's session up about 17% since Aug. 5 compared with a gain of about 7% in the previous quarter. Standard & Poor's 500Investor expectations for the leading cybersecurity company are high.
