Investors Sell Off Palo Alto Networks, But Analysts Like Long-Term Picture

Shares of Palo Alto Networks Inc PANW continued to drop Thursday after a mixed third-quarter earnings report that included a billings miss and weaker-than-expected guidance as the company said two acquisitions would hurt its fourth-quarter earnings.

But several sell-side analysts said it’s a short-term pain for long-term gain situation for the security hardware and software firm, suggesting investors’ uneasiness may create a buying opportunity.

The volatility followed Palo Alto’s announcement that it will acquire Twistlock for $410 million in cash and PureSec to boost its Prisma cloud security strategy.

The Analysts

Wells Fargo’s Philip Winslow maintained an Outperform rating on Palo Alto and lowered the the price target from $325 to $300.

Wedbush analyst Daniel Ives maintained an Outperform rating and lowered the price target from $300 to $275.

BMO Capital Markets analyst Keith Bachman retained an Outperform rating on the stock and lowered the target price from $285 to $250.

KeyBanc Capital Market’s Rob Owens reiterated an Overweight rating with a $280 price target.

The Takeaways 

“We view any weakness resulting from concerns about shortening billings duration and the resulting impact on reported cash flow as an attractive buying opportunity,” Wells Fargo’s Winslow said in a Thursday note. “Palo Alto Networks’ underlying fundamentals remain very healthy and valuation when adjusted for long-term deferred revenue remains compelling.”

Business Model Transition

Wedbush’s Ives said he sees the situation as “a near-term pain for long-term gain dynamic,” as the company and its peers transition from a firewall-based to a platform cloud business. 

While Ives said it’s smart to aggressively transition to the cloud, “the Street will be focused on the transition risks with this model shift around cash flow and billings dynamics in the near-term." 

Although continuing to rate the stock Outperform, BMO’s Bachman acknowledged “moving parts” in the company’s strategy and a debate over the durability of billings and revenue at Palo Alto. Bears are likely to win in the near-term, given weak billings and the uncertainty around how the company transitions to relying on subscriptions for revenue, the analyst said. 

“We think management would be well served to offer some longer term targets, given the implied business model transitions." 

'Haters Gonna Hate'

"Haters gonna hate," KeyBanc's Owens said in a Wednesday note, brushing off negative investor sentiment.

“While it might be difficult for investors to ‘shake off’ the negative response to the earnings report, we continue to see strong share gains amid a firewall refresh cycle coupled with increased traction in cloud and subscription services,” the analyst said. 

Price Action

Palo Alto Networks stock was down 5.35 percent at $203.79 at the time of publication Thursday. 

Related Links:

The Street Reacts To Palo Alto Hitting New Highs

Raymond James: Palo Alto Networks Continues To Gain Share

Actual EPS
EPS Surprise
Actual Rev
Rev Surprise
Posted In: Analyst ColorEarningsNewsGuidancePrice TargetReiterationAnalyst RatingsBMO Capital MarketsDaniel IvesKeith BachmanKeyBanc Capital MarketsPhilip WinslowRob OwensWedbushWells Fargo