What The Sell-Side Thinks Of Palo Alto

Wall Street slammed Palo Alto Networks Inc PANW with a slew of downgrades after its disappointing second quarter results, which was well below consensus. The company also guided third quarter below Street and cut its full-year outlook, amid strong competition from Cisco Systems, Inc. CSCO.

UBS’ Fatima Boolani downgraded shares to Neutral from Buy, saying Palo Alto is facing strong competition from Cisco, while other peers Check Point Software Technologies Ltd. CHKP and Fortinet Inc FTNT too capped off strong CY2016.

Following the weak quarterly print and tepid outlook, shares plunged more than 20 percent and lost a third of its value, thereby pricing in the now anaemic and de-risked full year growth.

“But a sustained stock rebound is likely to be stifled by nebulous conviction on the extent of outperiod growth recovery and skepticism on prior MT/LT financial targets in our view, given the Mar'17 analyst day has now been postponed,” analyst Fatima Boolani wrote in a note.

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Boolani, who cut her price target to $130 from $160, says the company must iron out its go-to-market mechanisms to better address its broadened portfolio, and aggressively enable/sell into its growing installed base.

Bill Choi of Wunderlich Securities too downgraded the shares of Palo Alto to Hold as product revenue and billings hurt by slower conversion of pipeline.

“[W]e believe resurgence of incumbent Cisco and, to an extent, Checkpoint, may be impeding PANW's footprint gains more than we thought. Firewall is mostly a displacement opportunity for PANW, and share gain is an imperative,” Choi wrote in a note.

Choi, who cut his price target to $150 from $190, says investors are concerned about lengthy duration for new subscriptions and support contracts (three years).

Jayson Noland of Baird also cited renewed competition from Cisco behind his downgrade of shares to Neutral.

“We believe Cisco has become a meaningfully stronger competitor per channel feedback. We feel more comfortable moving to the sidelines at this point as the company works through a sales coverage reorg,” Noland wrote.

Meanwhile, Jefferies kept its Hold rating intact saying “it’s unclear if something more could be happening here” apart from the execution woes. Analyst John DiFucci cut his price target to $130 from $153.

But, some analysts are still bullish on Palo Alto.

Wells Fargo maintained its Outperform rating as still views Palo Alto’s technology portfolio as competitively differentiated and go-to-market execution missteps that can be corrected with time. However, analyst Philip Winslow cut his valuation range to $180 to $190 from $190 to $200.

Joel Fishbein of BTIG stuck with his Buy rating as it remains confident in the company’s technology leadership and secular positioning and noted that win rates, customer additions, and “platform” annuities continue to be strong. That said, the analyst slashed his target price to $155 from $190.

RBC Capital reiterated its Outperform rating on the stock, but cut the price target to $140 from $170.

“While results and guidance were a big disappointment, we aren't throwing in the towel at these levels as we have confidence in our new estimates and believe management, which we still have a high degree of respect for, can fix the go-to-market issues and deliver above peer growth,” analyst Matthew Hedberg highlighted in a note.

Shares of Palo Alto plunged 22.31 percent to $118.01.