Palo Alto Networks bet big on bundling. Investors want more proof that it’s
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…
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