Cybersecurity Star Dims Ahead of News Dump

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Palo Alto Networks investors are betting that good things never happen late on a Friday afternoon

By  guest author Dan Gallagher from the Wall Street Journal.

Palo Alto gen 1 NNNN      The Palo Alto Networks’ coming report for its fourth fiscal quarter has some investors worried. Photo: Chris Jung/Zuma Press

Palo Alto Networks PANW 0.27%increase; green up pointing triangle has long been popular with Wall Street analysts. It will be interesting to see if that sticks after the cybersecurity provider ruins their weekend.

Ninety percent of analysts covering Palo Alto Networks rate the stock as a buy—the largest percentage of positive ratings of any cybersecurity company generating more than $1 billion in annual revenue, according to data from FactSet. And that is for good reason, as Palo Alto has been one of the more reliable performers in the highly volatile sector. Annual revenue growth has averaged well over 20 % over the past five years, while billings—a measure of business transacted in a given period—has beat analysts’ consensus forecast every quarter for the past four years.

But the company’s coming report for its fourth fiscal quarter has investors worried. Palo Alto will be reporting those results Friday after the closing bell—a highly unusual time for a scheduled earnings report. The company also noted that its conference call to discuss the results will last about two hours, as it also plans to update medium-term financial targets that were last given in an analyst meeting in 2021. It also plans to discuss items such as “product road map, go-to-market, financial objectives and total addressable market.”

An analyst meeting, in other words. But late Friday afternoon is an unusual time for those as well. Investors seem to be assuming the worst: Palo Alto’s stock has sunk nearly 15 % since the company announced its earnings date on Aug. 2. That is a sharp turn for a stock that was up 81 % for the year at that point and near its all-time high. A disappointing earnings report and forecast from rival Fortinet the following day added to worries that corporate cybersecurity spending may not be as safe as believed in an era of overall belt-tightening.

Palo Alto, for its part, said in a note from its investor relations team that the timing was in part due to “significant internal events” taking place over the next couple of weeks, including its annual “Kick Off” event for its sales force.

The company also said it wanted to give analysts time to “consume the data” and address follow-up questions, which suggests a potential business shift is in the works. In a report on Tuesday, Brad Zelnick of Deutsche Bank speculated that the company may use the event to announce its exit from the hardware side of the security business. Adam Borg of Stifel Institutional called mixed results or outlook the “highest likelihood event” in his own note to clients Monday. Both still rate the stock as a buy.

John DiFucci of Guggenheim Securities is a bit less sanguine. “In our experience, it’s not usually positive when management’s actions differ materially from the norm,” he wrote Tuesday, adding “given the complexity of Palo Alto Network’s business model and sometimes opaque disclosure, it’s hard to be sure of anything.” He rates the shares as neutral, though added that the business “has held up better than most” during the slowdown in corporate tech spending that began last year.

Surviving a Friday news dump might turn out to be an interesting way for Palo Alto to further secure its place at the top of the cybersecurity heap.

The Palo Alto Networks’ coming report for its fourth fiscal quarter has some investors worried. Photo: Chris Jung/Zuma Press