Palo Alto Networks (PANW) shares moved sharply lower in early Wednesday trading as analysts lined up to slash their ratings and price targets on the tech group following a disappointing outlook for cybersecurity spending.
With companies around the world working through nothing less than a digital revolution tied to advances in cryptocurrencies, artificial intelligence and cloud computing, IT-spending budgets are being stretched as never before.
Set against what many business leaders see as a slowing domestic economy, or at least one rife with uncertainty tied to global events, cybersecurity-spending plans have been put on hold as cash is allocated to other priorities in the tech space.
That's eating into the near-term forecasts for Palo Alto Networks, which takes in the bulk of its revenue from selling cybersecurity platforms designed to consolidate a company's overall protection from multiple vendors into a single platform with multiple use cases.
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Palo Alto added to that dynamic last night by unveiling a new "platformization" strategy it hopes will persuade customers to switch to its all-purpose systems.
The catch is that during that process, companies will be offered a bundled pack of Palo Alto tools on a free-trial basis spread over several months.
'Platformization' or 'free trial' at PANW?
"We are committed. We believe this is the right way forward. We believe this is the way we can deliver a faster platformization, a faster way to consolidate the industry into a platform," CEO Nikeh Arora told investors on a conference call late Tuesday.
"We hope that in the next five years, this allows us to double our business, which is why I'm here," he added.
The new tiered strategy, however, will have notable near-term implications for Palo Alto, which forecast current-quarter billings in the region of $2.3 billion to $2.35 billion, well shy of LSEG forecasts of $2.62 billion.
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The group added that fiscal-third-quarter earnings would fall to between $1.24 to $1.26 a share, with revenue easing to just under $2 billion.
For the three months ended in January, the group's fiscal second quarter, Palo Alto Networks posted a bottom line of $1.46 a share, well ahead of Wall Street's $1.30 consensus forecast, with revenue rising 19% from a year earlier to $1.98 billion.
"While appreciating that Palo has the product breadth and depth to compete head-to-head against its firewall and next-gen security peers, the more aggressive discounting strategy seems counter to what we view as an improving demand environment for IT/security in 2024," said KeyBanc Capital Markets analyst Eric Heath.
Heath, who lowered his price target by $10, to $380 a share, following last night's earnings report, carries an overweight rating on the stock.
'Right long-term move' for PANW: Ives
"While the model visibility is lower during this transition period to more aggressive discounting, we remain positive on Palo Alto Networks as the best positioned security consolidator and a leader in stronger secular growth markets," he said.
Wedbush analyst Dan Ives also slashed his Palo Alto price target following last night's update, taking it to $375 from $425, but affirmed his outperform rating.
"We fully expect many peers to throw in the white towel on Palo Alto this morning as after a Cinderella story the last few years the company now faces some near-term growth challenges," he said.
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"Our view is that the move to the platform approach in cybersecurity is the right long-term move for Palo Alto and will ultimately emerge from this transition in a stronger market position with now a conservative bar set for FY24 and [Wall Street] setting beatable FY25 estimates," Ives added.
Catharine Trebnick at Rosenblatt, who lowered her rating on Palo Alto to neutral from buy while reducing her price target $35 to $265 per share, called the group's new platformization strategy a "mid-quarter strategic adjustment."
"The company cites customer spending fatigue and the growing prioritization of solutions with demonstrable [return on investment] as the driving factors behind this course correction," Trebnick wrote.
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The impact on investor confidence, meanwhile, is clear: no fewer than 12 different Wall Street analysts have lowered their Palo Alto Networks price targets since the group's late Tuesday earnings call, with Trebnick at Rosenblatt the lowest at $265 per share.
The steepest cut came from Stifel analyst Adam Borg – who just a week ago raised his price target – lopping it by $80 to $330 per share.
"Last night will go down as a brutal night to forget for the bulls (and us)," Ives at Wedbush wrote. "And while we recognize this stock is in the penalty box, Palo Alto is a core name in the cybersecurity sector to play the emerging cloud and AI trends we see on the horizon."
Palo Alto Networks shares were marked 26.3% lower in early Wednesday trading to change hands at $269.94 each.
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