What Happened:
Shares of cybersecurity provider Palo Alto Networks (NASDAQ:PANW) jumped 7.14% in the morning session after the company reported fourth quarter earnings that exceeded analysts' expectations for remaining performance obligations (RPO, a leading indicator of revenue). Notably, the next-generation security segment continued to outperform, driving annual recurring revenue (ARR) growth of 56% during the quarter, which exceeded consensus expectations. ARR is a critical growth metric to watch as the company transitions from a legacy hardware provider to a subscription-based business. In contrast, other top-line metrics, including revenue and billings missed by a narrow margin and were roughly in line with expectations. Management provided some insights into the softness during the company's earnings call, stating, "Broadly, the industry has experienced an increase in deal scrutiny as well as deal pushouts." The company further noted, "We have seen the market return to a more normalized growth rate in hardware-based firewalls."
Moving on, earnings per share exceeded expectations, while gross margin improved significantly during the quarter. The company also continued to generate strong free cash flow. These results provided some reassurance following market concerns regarding the late Friday release of earnings. Looking ahead, revenue guidance for FY2024 came in below expectations, though billings came in slightly ahead. Similarly, revenue guidance for the next quarter missed.
Overall, this was a mixed quarter for Palo Alto Networks, but the market is reacting favorably as its new AI-based security automation platform, XSIAM, is gaining early traction.
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What is the market telling us:
Palo Alto Networks's shares are not very volatile than the market average and over the last year have had only 14 moves greater than 5%.
The previous big move we wrote about was 18 days ago, when the company dropped 6.91% on the news that competitor, Fortinet, reported disappointing second-quarter earnings results. Key topline metrics, including revenue and billings, missed Wall Street's estimates. In addition, the company lowered full-year revenue guidance. Fortinet guided full year revenue to fall within a range of $5.35B to $5.45B, down from a prior view of $5.43B to $5.49B.
Following the result, TD Cowen analyst downgraded Fortinet's stock rating from Outperform (Buy) to Market Perform (Hold) and lowered the target price from $90 to $70.
Palo Alto Networks is up 75.2% since the beginning of the year, and at $242.69 per share it is trading close to its 52-week high of $257.88 from July 2023. Investors who bought $1,000 worth of Palo Alto Networks's shares five years ago would now be looking at an investment worth $3,430.
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