Palo Alto Networks CEO says second quarter results still "displayed many signs of positive momentum"
Shares of Palo Alto Networks (PANW) are sliding on Tuesday after the security software company's second quarter sales fell short of expectations and it cut its annual forecast. Following the announcement, several Wall Street analysts downgraded the stock to Neutral-equivalent ratings. However, some still remain bullish on Palo Alto Networks, with Jefferies analyst Brent Thill viewing the shares as a "bargain" following the earnings selloff.
RESULTS: On Monday after market close, Palo Alto Networks reported second quarter adjusted earnings per share of $1.19, above consensus of $1.12, and second quarter revenue of $816.7M, which was below the expected $843.3M. The company also proposed a $1B accelerated share repurchase transaction and said it sees third quarter earnings per share between 96c-98c, with consensus at $1.25. Additionally, Palo Alto Networks cut its fiscal year 2020 adjusted earnings per share view to $4.55-$4.65 from $4.90-$5.00, and its fiscal year 2020 revenue view to $3.35B-$3.39B from $3.44B-$3.48B.
"Our fiscal second quarter displayed many signs of positive momentum; notably billings for our Next-Generation Security offerings continued to perform very well," said Nikesh Arora, chairman and CEO of Palo Alto Networks. "Fiscal second quarter revenue was below our expectations primarily as a result of continued impact of sales incentives related to our Next-Generation Security products from our prior fiscal year. We have made progress to address this and have implemented several go-to-market programs to reignite our firewall sales growth."
MOVING TO THE SIDELINES: Following two quarters of declining product growth, Dougherty analyst Catharine Trebnick downgraded Palo Alto Networks to Neutral from Buy. Execution issues have persisted and Trebnick sees Palo Alto "struggling to craft a balanced product and next generation security sales force message." She also believes the stock's current valuation is appropriate given the company's internal issues. JPMorgan analyst Sterling Auty also cut Palo Alto Networks’ rating to Neutral from Overweight and lowered his price target on the shares to $236 from $284. The analyst believes it could take two-to-three quarters for investors to feel more comfortable with the company's product outlook being consistently able to grow again. "That likely keeps a lid" on the stock's performance, Auty contended.
Meanwhile, Raymond James analyst Michael Turits downgraded Palo Alto Networks to Market Perform from Outperform following another quarter of missed product revenue that he thinks further erodes confidence in Palo's ability to execute in what remains its core firewall market. In a research note to investors of his own, Turits argued that while channel checks did not give him confidence the second quarter was the turnaround, the magnitude of the product drop was far worse than he expected. This reinforces concerns Palo Alto has fallen behind Fortinet (FTNT) competitively in the core market, including being late to market with integrated SD-WAN, according to the analyst.
Voicing similar concerns, Deutsche Bank analyst Karl Keirstead cut Palo Alto Networks' rating to Hold from Buy and lowered his price target on the shares to $210 from $275, adding that he believes a slowdown of this magnitude "feels more like a network firewall hardware problem that is likely to persist throughout 2020." BMO Capital and RBC Capital also downgraded the stock to Neutral-equivalent ratings.
SHARES 'A BARGAIN': Jefferies analyst Brent Thill lowered his price target for Palo Alto Networks to $266 from $275 but kept a Buy rating on the shares. The analyst argued that when looking beyond the surface and interpreting a key reason for decline in physical firewall sales, or re-aligning sales incentives aimed at increasing cloud product sales, he arrives at the conclusion that Palo Alto is "actually one of few best-positioned" to capture hybrid network security demand. Moreover, Thill views the shares as a "bargain" on the earnings selloff.
Also lowering his price target on the shares to $250 from $275, Oppenheimer analyst Shaul Eyal maintained an Outperform rating for Palo Alto Networks as he remains constructive on its long-term opportunity. The analyst views the company’s goal to become a preferred security platform vendor as slowly taking shape through traction from Prisma+Cortex on the cloud portfolio side.
Also remaining bullish on the stock, Morgan Stanley analyst Keith Weiss lowered his price target on Palo Alto Networks to $300 from $315 and kept an Overweight rating on the shares. While he is "frustrated" by the company's inconsistency, he continues to view firewall growth issues as execution related and still has confidence in the potential for firewall growth to bounce back. Weiss also believes the secular story remains intact, noting that the Next Generation Cloud platform was up 101% year-over-year.
SunTrust, Wedbush, Citi and Mizuho also cut their price targets for Palo Alto Network's but maintained Buy-equivalent ratings on the name.
PRICE ACTION: In afternoon trading, shares of Palo Alto Networks have dropped almost 17% to $197.25.
"Street Fight" is The Fly's recurring series of exclusive stories that highlight a stock or sector that is in focus amid divergent views from Wall Street analysts.