Can Palo Alto Networks Overcome a Cut in Customer Tech Spending?

Cybersecurity company Palo Alto Networks (PANW) slumped more than -25% today to a 2-1/2 month low after the company cut its annual revenue forecast late Tuesday, fueling concerns that customers are reigning in on technology spending.  The company cut its full-year revenue forecast to $7.95 billion-$8.00 billion from a previous estimate of $8.15 billion-$8.20 billion, weaker than the consensus of $8.18 billion. 

The company’s revenue outlook suggests that customers may be cutting back on cybersecurity spending, even as online attacks proliferate.  The top end of Palo Alto Networks’ annual sales forecast represents an increase of +16%, well below the 25%-plus growth rate of recent years.  Shares of Pala Alto Networks had risen +24% this year as of Tuesday, outperforming most tech stocks, with investors and analysts betting that cybersecurity investments would continue to increase.

Despite cutting guidance on its full-year revenue forecast, Palo Alto Networks did maintain its outlook for earnings and free cash flow for 2024, which CFO Golechha said reflects “disciplined execution on profitable growth.”  Palo Alto Networks CEO Arora said customers were facing “spending fatigue” in cybersecurity and that they were finding that adding incremental products “is not necessarily driving a better security outcome for them.”

Palo Alto Networks reported Q2 sales of $1.98 billion, which ended January 31, up +19% from a year earlier and better than the consensus of $1/97 billion.  However, the company said billings will range as high as $10.2 billion this year, weaker than a previous forecast of $10.8 billion.  Product revenue growth grew more slowly than service and support sales, underscoring an ongoing shift at the company.  CEO Arora said customers are becoming more demanding of security companies as hacking attacks worsen, adding, “We’re increasingly focusing on working with companies impacted by breaches.”

Some analysts are still upbeat on Palo Alto Networks despite today’s setback.  Jeffries maintained its buy rating on Palo Alto Networks and said they remain “massive fans” of the company’s long-term story, although the stock “will be under duress in the interim.”  Also, Vital Knowledge said the outlook isn’t as bad as it looks as the company is accelerating its “platformization and consolidation” strategy, and “therefore the guidance cut isn’t in response to weakening demand dynamics but instead a deliberate step by the company to improve the medium and long-term outlook.” 

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.