Palo Alto nears a key test that could break it out of Wall Street’s penalty box

Palo Alto Networks is clawing its way back after a brutal earnings sell-off in February, and Wall Street analysts say the cybersecurity company’s earnings next week will justify its resurgence. Shares of Palo Alto plunged 28% on Feb. 21, a session after the company delivered a more cautious outlook for the rest of 2024. The stock then seesawed for more than a month until shares bottomed out at $265 apiece on April 4. At the top of investors’ worries: Softness in the U.S. federal government market, along with the financial impact of ramping up its “platformization” strategy to bundle services and products. However, Palo Alto’s stock has since advanced 13.2%, outperforming the iShares Cybersecurity and Tech ETF ‘s 1.2% decline over the same period. There are three reasons that investor sentiment will continue to improve into the May 20 earnings release and beyond, according to recent research notes from Barclays and Morgan Stanley. 1. History unlikely to repeat itself Sellers came out in full force after CEO Nikesh Arora announced a pivot to accelerate “platformization” during the February conference call. The shift in business strategy requires Palo Alto to give customers its new services and products for free to demonstrate their many benefits. This, in turn, would impact billings and revenue growth over the next 12 to 18 months. Palo Alto argued that near-term headwinds would pay off down the road with larger deals as customers look for a one-stop shop for their cybersecurity offerings. The company in February lowered its fiscal 2024 total billings guidance to a range of $10.1 billion to $10.2 billion. Prior guidance was $10.7 billion to $10.8 billion. Its new outlook was below Wall Street analysts’ estimates at the time of $10.74 billion. Meanwhile, Palo Alto delivered a total revenue outlook of $7.95 billion to $8 billion for fiscal 2024, lower than the company’s previous guidance of $8.15 to $8.2 billion. Analysts’ expectations were $8.19 billion as well. But Barclays analysts said these discounted offerings shouldn’t impact the company’s three-month financial performance. “This is the first quarter where PANW is scaling its free trials [and] platformization strategy, but we haven’t picked up any meaningful [go-to-market strategy] changes in our checks quite yet so the headwind to billings from free trials may be smaller than expected,” the analysts wrote in a May 7 note. Plus, given that management has already lowered Palo Alto Network’s guidance for the rest of 2024, analysts say billing estimates for the upcoming print are de-risked. This means figures were so conservative last quarter that investors believe the odds of further downside are low. Not only may this circumvent another huge decline in the stock price after results, but it gives management ample room to beat expectations. During Palo Alto’s post-earnings call, we’re eager to learn more about how Arora’s bet on platformization is playing out, including clearer timing on when the company will profit from the new strategy. We’d also like to learn more about how customers are responding to the free trials and an update on the adoption rate of Palo Alto’s more consolidated offerings. PANW YTD mountain Palo Alto Networks (PANW) year-to-date performance 2. Palo Alto’s market share is growing While it’s been a volatile year for Palo Alto stock, the company has been busy grabbing more market share, according to analysts. “PANW continues to gain share across multiple security categories, as enterprises adopt the broader platform,” Morgan Stanley analysts wrote. Meanwhile, Barclays said “platformization is happening, but not because of free trials — just good old fashioned cross-selling and competitiveness.” Palo Alto Networks has nabbed a series of large deals. Our favorite cybersecurity name and portfolio stock was tapped to help UnitedHealth Group subsidiary, Change Healthcare, after a massive attack in February caused huge disruptions throughout the U.S. healthcare system. In a recent interview with CEO Arora, Jim Cramer said that Change Healthcare “brought [Palo Alto] in because [they] understood how to fix it,” praising the company for its track record of offering effective cybersecurity solutions over its competitors. Arora has long said that Palo Alto’s move to platformization will secure its lead among peers as the industry consolidates spending. “If you have 10, 20, 30 cybersecurity vendors deployed in your infrastructure, you need the data from all of them,” CEO Arora said on “Mad Money ” last week. “You need to be able to analyze it on the fly.” The Club took a similar hopeful stance back when shareholders panic sold the stock after earnings. We’ve held out on the view that short-term pain is worth the long-term gains, and even bought up shares of Palo Alto twice since second-quarter earnings on the weakness. 3. A good time to be a leader in cybersecurity Finally, analysts like the backdrop for the cybersecurity sector. Demand for industry offerings remains high as companies increasingly face more threats from bad actors. We’ve seen this amid a slew of high-profile security incidents in 2024. In addition to Change Healthcare, Club holding Microsoft also disclosed in January that hackers targeted staff email accounts , including those of top executives. Other major companies like cleaning supply distributor Clorox , Vans owner VF Corp and casino operator Caesars Entertainment all disclosed attacks last year. Morgan Stanley analysts said that their latest survey checks suggest “durable security demand, despite concerns around ‘spending fatigue’ last quarter.” “Cybersecurity remains a relative bright spot as rising threats and new regulatory requirements drive greater C-level priority,” Morgan Stanley analysts wrote, nudging at the Securities and Exchange Commission’s more stringent disclosure rule s for publicly-traded U.S. companies. U.S. federal spending looks better than it did last quarter as well, improving demand for cybersecurity offerings broadly, Barclays said, citing peer commentary. Tenable management, for example, previously issued upbeat remarks regarding spend during a May 1 conference call, with CFO Stephen Vintz describing the federal pipeline as “strong.” For its part, Palo Alto said that the company had several projects with the federal government that did not close in the previous quarter. “All in all, we feel good about the 3Q setup on billings, [annual recurring revenue], and [free cash flow], based on the bar, our own checks, and activity in the US Fed market – we still think PANW needs to rebuild investor confidence with at least another quarter of consistent performance, but we think this 3Q could start that process,” Barclays analysts wrote. The Club is focused on how much industry spend is going to Palo Alto versus competitors, but we’re not concerned about demand for the company’s offerings. “I’m a big believer in Palo Alto because the demand in cyber protection is endless, especially now that the hackers have access to AI and this company has the most comprehensive suite of solutions out there,” Jim said last week. (Jim Cramer’s Charitable Trust is long PANW, MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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