Cybersecurity firm Palo Alto Networks has lowered the bar heading into its fiscal third quarter earnings report on Monday, with Wall Street expecting only 3.3% billings growth. But expectations for Palo Alto stock are higher for the July quarter and fiscal 2025.
Evercore ISI analyst Peter Levine says Palo Alto needs to rebuild confidence on Wall Street amid recent quarterly misses on key financial metrics, such as billings.
"It's unclear to us how much visibility management currently has, considering the complexity of all the moving parts," he said in a report.
Heading into the Palo Alto earnings report, nine analysts have hold ratings on PANW stock. Twenty-seven analysts have buy or overweight ratings on Palo Alto stock.
When Palo Alto reported fiscal Q2 earnings, it announced an "Accelerated Platformization and Consolidation" strategy that reduced billings because of customer perks. Management commented on customer "spending fatigue," which spooked investors.
Palo Alto stock has advanced 8% in 2024. Shares are down 12% from a year ago.
"The stock has recovered almost half of its (post- fiscal Q2) earning pullback of 30%," said Wedbush analyst Daniel Ives in a report. "When we analyze what is being priced in the stock at these levels, we find that the high end of the buyside billings expectations should be enough to support the stock."
Slowing Growth in Firewall Market
In its core business, sales for firewall network appliances have slowed. Firewall appliances protect computer networks by blocking online intrusions and monitoring web-based apps. However, Palo Alto has built a broad cloud-based security platform through acquisitions. Cloud software revenue is becoming a larger part of overall sales.
For the April quarter, analysts project EPS on an adjusted basis of $1.25, up 14%. Revenue for Palo Alto stock is also expected to grow 14% to $1.97 billion.
At Bank of America, analyst Tal Liani said in a report: We believe Palo Alto Networks will report on a solid quarter overall, on the back of reduced expectations and growth in next generation security offsetting likely weak firewall trends."
Billings, a key sales growth metric, are expected to grow 3.3% in fiscal Q3 to $2.33 billion. Management has told analysts that companies are taking longer to approve computer security purchases.
Analysts polled by Visible Alpha forecast 9% billings growth in the July quarter, 12% in fiscal 2025 and 16.5% in fiscal 2026.
"Forward billings growth now suggests a sizable deceleration with a hope that fiscal 2026 can reaccelerate due to a new (cloud) platform consolidation strategy," said Adam Tindle, a Raymond James analyst, in a report.
Palo Alto Stock: Upside From 'Thunderdome'
Further, Palo Alto's federal government business remains a bright spot, analysts say. "Our checks also indicate a pickup in the Thunderdome project, a large 5-year, $1.9 billion initiative (awarded to multiple vendors, including Palo Alto) to modernize the Department of Defenses' network security architecture," said Morgan Stanley analyst Hamza Fodderwala in a report.
Also, some analysts expect upside from a data breach at United Healthcare. It picked Palo Alto as one of the cybersecurity firms hired for incident response to help restore computer systems.
Meanwhile, Palo Alto on May 15 said it will acquire IBM's QRadar cybersecurity assets. IBM and Palo Alto did not disclose financial terms.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
