PANW Stock Declines, Guidance Falls below Estimates

Palo Alto Networks (PANW) shares have fallen more than 8.5% in pre-market trading today. The company announced its earnings results for the first quarter of 2020 on Monday after the market close. Palo Alto Networks reported sales of $771.9 million with an adjusted EPS of $1.05.

Analysts expected PANW to post sales of $767.77 million and an EPS of $1.03 in the October quarter. So, why are the shares trading lower despite the consensus earnings and revenue beat? PANW’s outlook for the second quarter was below analysts’ estimates.

Palo Alto Networks expects sales between $838 million and $848 million in the second quarter. The expectation indicates a midpoint sales forecast of $843 million, which is lower than the consensus estimates of $845.12 million. The adjusted EPS in the second quarter is estimated to be $1.11–$1.13, which is considerably below the consensus earnings forecast of $1.30.

For fiscal 2020, Palo Alto Networks expects sales between $3.44 billion and $3.46 billion with an EPS between $4.9 and $5.0. In comparison, analysts expect PANW to post revenues of $3.46 billion and an EPS of $5.07 in 2020.

Palo Alto Networks stock rose in after-hours trading after it announced the fourth-quarter earnings results.

What impacted PANW’s sales in Q1?

In the first quarter of 2020, PANW’s sales rose 18%, while its billings rose 18% to $897.4 million. During the analyst day event in September, the company’s management expected annual billings of more than $800 million in next-gen security. In the first quarter, the company’s next-gen security billings were $170 million—217% growth year-over-year. PANW increased its fiscal forecast to $810 million–$820 million in 2020.

PANW CEO Nikesh Arora said, “Palo Alto Networks’ multi-platform approach to security is clearly resonating with our customers. Our Next-Gen Security offerings performed extremely well in our first fiscal quarter, bolstering our confidence in our long-term prospects for Prisma and Cortex.”

He also said, “At our recent Ignite conference, we introduced significant product enhancements, including Cortex XDR 2.0, SD-WAN and DLP capabilities for Prisma Access and the integration of Twistlock and PureSec into Prisma Cloud, that should sustain this momentum.”

PANW intends to acquire Aporeto

On Monday, Palo Alto Networks announced that it intends to acquire Aporeto for $150 million in an all-cash transaction. Aporeto provides cloud-native security services. The company has raised around $34.5 million to date, according to Crunchbase.

Aporeto was founded in 2016. The company raised $20 million in its last funding round in January. Aporeto’s lead investors include Comcast Ventures and Norwest Venture Partners.

Aporeto is Palo Alto Networks’ fifth acquisition in 2019. In September, PANW completed the acquisition of Zingbox—an IoT cybersecurity firm. Palo Alto Networks acquired two cloud security startups in July. The company acquired Demisto in March to gain traction in the AI security segment.

What’s next for investors?

Palo Alto Networks is part of a high growth segment. Although there are concerns about lower enterprise tech spending heading into 2020, the long-term prospects look encouraging. PANW is also looking at inorganic growth. Notably, the company is one of the top players in enterprise security.

At the end of the second quarter, PANW accounted for 16.2% of the worldwide security appliance market, according to research firm IDC. While the industry growth was strong at 10.4%, PANW managed to increase its sales 22.3% to $633.7 million.

The other top players are Cisco (CSCO), Fortinet (FTNT), Checkpoint (CHKP), and Symantec with shares of 16.8%, 11.5%, 10.3%, and 4.1%, respectively. Cisco’s sales have risen 17.9%, while Fortinet’s sales have risen 16.6% YoY. In comparison, IDC estimated Checkpoint’s sales growth to be lower than the industry growth at 4.4%.

PANW was recognized for its technical expertise. The company was named as a “leader” in Gartner’s Magic Quadrant for the eighth consecutive time.

Despite the guidance miss, analysts remain bullish on PANW stock. Investment bank Jefferies reiterated a “buy” rating on the stock with a target price of $275. Citi raised the stock’s target price from $247 to $283, despite the guidance miss, due to its strong performance in cloud subscriptions.

Barclays maintained an “overweight” rating but lowered PANW’s target price from $264 to $260. Currently, PANW stock is trading at $230 per share. The stock has gained 26% year-to-date. Notably, the stock has returned 87% in the last five years.