Palo Alto Networks Shares Fall After Analyst's View On Billings

Shares of Palo Alto Networks Inc PANW dropped as much as 10 percent Thursday after a Wall Street analyst said the company's quarterly report would be less-robust than usual and outlook would create volatility in the near term.

Palo Alto Networks will release its financial results for its second quarter of fiscal year 2016 ended January 31, 2016 after U.S. markets close on Thursday, February 25, 2016. Wall Street expects earnings of 39 cents a share on revenue of $318.09 million.

"We anticipate some volatility after PANW reports its January quarter. The company has reported significant upside in the past couple quarters, particularly for billings, which we do not anticipate to occur this quarter," JMP Securities analyst Erik Suppiger wrote in a note to clients.

Related Link: Palo Alto Networks Plunges After JMP Analysts Note "Challenging" Sales Environment

Leading up to January, the analyst's checks suggested Palo Alto's sales momentum was strong, driven by continued momentum with large enterprises and adoption of emerging products. However, recent channel conversations noted that shipping activity toward the end of the quarter was more rushed than usual, indicating a challenging sales environment.

Increased uncertainty related to macroeconomic conditions and market volatility led to softer IT spending in the month of January. Palo Alto's management has indicated that seasonality in the first quarter and third quarter of each fiscal year will become more pronounced over time and the analyst is concerned that it may compound visibility issues brought on by macroeconomic conditions.

The analyst trimmed his third quarter EPS estimate to 42 cents from 44 cents and cut revenue estimate to $330 million from $334 million. Suppiger also reduced third quarter billings estimate to $432 million from $438 million, and price target to $165 from $220 to reflect a compression in valuation multiples and slower growth in free cash flow.

Rating And Justification

However, the analyst maintained his Market Outperform rating on the stock saying that Palo Alto remains well positioned to benefit from an attractive long-term growth opportunity in the security market. He noted that Palo Alto's competitive position remains strong, and emerging products continue to generate healthy demand.

"Importantly, we remain confident in our thesis that Palo Alto can garner the #1 market share position in the network security market as the company continues to utilize its platform strategy to gain share from its larger competitors. Accordingly, we would view any sell-off in the shares post-earnings as a buying opportunity," Suppiger added.