Why Palo Alto Networks Stock Crashed Wednesday Morning

Feb 21, 2024

Shares of Palo Alto Networks (NASDAQ: PANW) turned sharply lower Wednesday morning, falling as much as 27%. As of 10:44 a.m. ET, the stock was still down 25.9%.

The catalyst that sent the cybersecurity specialist plunging was its quarterly financial report. While results were better than expected, the company announced a major change to its strategy that caught investors off guard.

Solid results

For its fiscal 2024 second quarter (ended Jan. 31), Palo Alto Networks’ revenue grew 19% year over year to $2 billion, fueled by existing customers increasing their spending. This resulted in adjusted earnings per share (EPS) that rose 39% to $1.46.

To give those numbers context, analysts’ consensus estimates were calling for revenue of $1.65 billion and adjusted EPS of $1.30, so Palo Alto Networks cleared both bars with room to spare.

Total billings — or contractually obligated sales that haven’t yet been booked as revenue — provide insight into the company’s future growth potential, and there appeared to be trouble on the horizon. Second-quarter billings increased to $2.35 billion, up 16% year over year. When billings grow more slowly than current revenue growth, this suggests a potential slump in future sales.

A major strategic pivot

CEO Nikesh Arora revealed a major shift in strategy that caught investors off guard. The company will offer increased incentives, including free product offers, in a bid to get customers to adopt more of its products and services. The resulting uncertainty had some investors running for the exits.

In keeping with its plans, management slashed its guidance. For its fiscal third quarter, executives are forecasting revenue in a range of $1.95 billion to $1.98 billion, or year-over-year growth of 14% at the midpoint. The company also expects diluted adjusted EPS of $1.25. Even more troubling was projected billings of $2.33 billion, or an uptick of just 3% at the midpoint. This suggests a rapid deceleration in growth.

For fiscal 2024, management is forecasting revenue of $8 billion, up roughly 15% year over year. Palo Alto Networks expects total billings of roughly $10.15 billion at the midpoint of its guidance, which would equal growth of about 11%.

This is a major shift in strategy, and it remains to be seen whether management can pull this off, which is why the stock plummeted.

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Danny Vena has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palo Alto Networks. The Motley Fool has a disclosure policy.

Why Palo Alto Networks Stock Crashed Wednesday Morning was originally published by The Motley Fool

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