Another earnings report, one other sell-off in prolonged trading for Palo Alto Networks. But as we did within the two pre-earnings releases on Monday night, we view the decline as a buying opportunity for long-term investors. The cybersecurity company’s third-quarter fiscal 2024 revenue rose 15% year-over-year to $1.985 billion, beating LSEG’s consensus estimate of $1.967 billion. Adjusted earnings per share rose 20% to $1.32 within the three months ended April 30, above estimates of $1.25 per share, LSEG data showed. According to FactSet, total billings rose a meager 3% 12 months over 12 months to $2.33 billion, falling wanting estimates of $2.34 billion. However, Palo Alto’s remaining performance obligation (RPO) accelerated to a 23% year-over-year growth rate, in comparison with a 22% rate within the previous quarter. Palo Alto Networks Why We Own It: We imagine cybersecurity is a secular growth market because malicious actors are relentless and corporations simply cannot afford not to take a position in defense. It’s a never-ending arms race. We imagine Palo Alto Networks particularly is in a novel position to win because of its best-in-class tools and broad product portfolio that permits it to offer an all-inclusive cybersecurity “platform” solution. Competitors: CrowdStrike, Fortinet, Cisco Systems Last Purchased: April 8, 2024 Started: February 15, 2023 Conclusion This was a robust quarter for Palo Alto Networks, despite what the stock response might suggest. And ultimately, we are likely to view the stock’s decline as a buying opportunity – just as we did in November and again in February. Even if billing trends aren’t what Wall Street desires to see, the query for investors is: Do you think that CEO Nikesh Arora believes billings are not any longer as meaningful a metric as they was once, and that we must always as a substitute deal with the remaining performance obligation? Trends? This is a key query that bulls and bears are sure to argue about, as billings declined significantly while RPO showed sequential acceleration. In our opinion, Aurora’s argument is sound. Billings represent the overall amount actually billed during a particular period. RPO represents the overall value contracted throughout the quarter. Understandably, investors prefer settlements because they’re more concrete. After all, things like churn and cancellations are risks for an organization that really realizes its RPO as revenue afterward. The problem with settlements immediately is the associated fee of cash – due to the best federal funds rate in 20 years – which is resulting in increased negotiations over settlement terms and financing options. Therefore, we understand management’s desire to scale back the emphasis on billings and as a substitute deal with RPO. We cannot entirely dismiss the momentum in billings, but we’re very encouraged by the slight increase in RPO growth. It also needs to be noted that management actually increased its billing backlog within the third quarter, a sign of strong demand despite some jitters within the reported numbers. Against this background, management’s forecast for the longer term also looks good, as sales and earnings within the fourth quarter are expected to satisfy expectations. The outlook for settlements is somewhat bleak, but again, we imagine the outcomes – and guidance – for this metric ought to be viewed with caution on this high-yield world. This is particularly true given the divergence between billings and RPO. On the earnings call, Arora gave a positive update on the corporate’s decision to speed up its “platformization” strategy, causing the stock to plunge 28% in a single session following the February earnings report. Essentially, management is offering concessions to customers who’ve used multiple cybersecurity providers to entice them to migrate to Palo Alto’s platforms. The company decided to just accept short-term problems within the hope of securing long-term profits, with growth accelerating once the promotional phase was behind it. “I am pleased to report that despite concerns about our platformization approach, customer feedback has been nothing but encouraging following our most recent quarter. We’ve sparked a lot more conversations about our platformization than we expected,” said Arora. “If meetings were a measure of final result, they were up 30%, and far of that was focused on platform opportunities. In short, demand is powerful and I expect this to proceed to be the case over the subsequent few quarters.” These comments from Arora reflect our opportunistic view of the stock’s decline in extended trading. What we heard on the call is extremely encouraging, aside from the weakness in billings. The company is signing large, long-term contracts, and customers are embracing the idea of platformization – and clearly understand the need for platformization, especially as malicious actors now harness the power of artificial intelligence. On the call, management highlighted several deals where Palo Alto edged out the competition not only because of its best-in-class solutions, but also because of its ability to truly offer a platform strategy rather than point solutions. Arora also offered an optimistic update on Palo Alto’s collaboration with UnitedHealth in response to the disruptive cyberattack on its Change Healthcare subsidiary, but did not name the company directly. “A large healthcare company experienced a breach and engaged our Unit 42 incident response services. After helping the customer resolve the situation and get back online, we were able to educate them on the benefits of platformization,” said Arora. “The customer has fully collaborated with us and standardized our network security, Prisma Cloud and Cortex. This transaction was the largest in Palo Alto Networks’ history, with a total contract value of nearly $150 million.” Overall, now we have little question that cybersecurity is a secular growth market that may proceed to be in demand, and on the enterprise level, we imagine that Palo Alto Networks has each the tools to reply to customers’ needs and a superb technique to ensure they proceed to be in demand as top players for years to return. With management noting that the platformization discussions are coming together quicker than expected, we’re not too concerned about Monday night’s stock move and see longer-term upside potential. At the identical time, we recognize Wall Street’s current deal with settlements. For this reason, we maintain our 2 rating on Palo Alto as we search for shares to stabilize before we step in and buy back the shares we sold higher last week upfront of the report. We sold out of discipline since the stock had risen greater than 17% in a period of about six weeks prior to trading. This is another excuse we are able to take a look at the sell-off from a buyer’s perspective. Forecast For the fourth quarter of fiscal 2024, the corporate expects (all estimates are from FactSet): total billings within the range of $3.43 billion to $3.48 billion, up barely on the midpoint from estimates of $3.45 billion -Dollar. Total sales are $2.15 billion to $2.17 billion, which is midway through the estimate of $2.16 billion. Non-GAAP earnings per share are expected to be between $1.40 and $1.42, in comparison with estimates of $1.41 on the midpoint. For full-year 2024, management expects: Total billings within the range of $10.13 billion to $10.18 billion, representing a slight increase on the midpoint in comparison with a previous range of $10.1 billion to $10.2 billion . Investors could have concerns with the cut on the high end. At the midpoint, the revised guidance also represents a miss from the Street’s $10.17 billion goal. Total sales are at $7.99 billion to $8.01 billion, up from the previous range of $7. $95 billion to $8 billion and above expectations of $7.99 billion. Non-GAAP earnings per share are expected in a spread of $5.56 to $5.58, up from the previous range of $5.45 to $5.55. That’s above the consensus estimate of $5.52 per share. Adjusted free money flow margin of 38.5% to 39%, an improvement from previous guidance of 38% to 39%. (Jim Cramer’s Charitable Trust is long PANW. See a full list of stocks here.) As a subscriber to CNBC Investing Club with Jim Cramer, you’ll 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 foundation’s portfolio. If Jim discussed a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. 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Signage outside Palo Alto Networks headquarters in Santa Clara, California, USA, on Thursday, May 13, 2021.
David Paul Morris | Bloomberg | Getty Images
Another earnings report, one other sell-off in prolonged trading Palo Alto Networks. But as we did within the two pre-earnings releases on Monday night, we view the decline as a buying opportunity for long-term investors.
