Palo Alto Networks Inc. shares were headed for their worst day on record as Wall Street fretted about a strategic pivot that’s expected to hit results in the near term.
If the Wednesday morning action carried through to the close, it would mark the worst one-day percentage drop for Palo Alto Networks in its history. The current record is a 24.2% plunge, which took place on March 1, 2017.
“Palo Alto Network’s shift towards platformization, consolidating point products onto one of their three platforms, raises concerns about the
potential for a slower path to achieving the company’s goals,” wrote Rosenblatt Securities analyst Catharine Trebnick. “This strategic move could have several near-term and mid-term impacts on stakeholders.”
Trebnick, who downgraded the stock to neutral from buy Wednesday, noted that the move could make channel partners frustrated “by having to sell more products within the same budget constraints.” Additionally, it could take time to train the sales teams on the new messaging.
Meanwhile, Palo Alto Networks is also trying to position itself more as an artificial-intelligence leader but the “platform’s reliance on AI may necessitate higher investments, potentially impacting margins,” Trebnick continued, as she cut her price target to $265 from $290.
Piper Sandler’s Rob Owens also downgraded the stock, writing that Palo Alto Networks was “creating a large degree of investor consternation” for the third consecutive quarter.
The company “is the largest platform player in the segment and, in hopes to accelerate that positioning, will take an aggressive approach in offering free product with the promise of longer-term, platform contracts,” Owens explained. “This should negatively impact the business for 12-18 months — eliminating $600M from billings estimates in the back half of this year.”
While he continues to see long-term opportunity for the company, Owens said “the steps taken this quarter undoubtedly raise uncertainty in the narrative as execution risk is elevated under current plans.”
He moved to a neutral rating on the stock from his prior overweight stance, while cutting his target price to $300 from $350.
Guggenheim’s John DiFucci said that 12 to 18 months is a long time for investors to wait, and he argued that the term “platformization,” when described, “sounds like what they’ve been doing all along,” with the exception being that Palo Alto Networks will now offer customers a “bridge” as they add additional products and transition away from legacy ones.
“We don’t blame PANW for doing whatever they believe is the right thing for the company over the long term,” DiFucci wrote, but he has questions about why “other companies embark on similar paths of consolidation without having to give away product for a time” and why Palo Alto Networks delivered this “major change on a quarterly conference call when results are weak,” rather than six months back when the company hosted a Friday evening earnings call.
DiFucci rates the stock at neutral.
Raymond James analyst Adam Tindle said he will “need evidence that this abrupt pivot is poised to yield acceleration,” in a note to clients titled: “Yellow Flags Become Red.”
“While the stock is poised to be punished, and we are not dogmatic in our views, we struggle with the near/intermediate term investment case from here,” he wrote. “Consider, Palo is abruptly pushing a strategy whereby customers will receive free products for a commitment to consolidate on the platform, yet our downgrade cited general skepticism in the channel, and we doubt these partners will push a further consolidation with a vendor where they generally struggle with trust.”
At the same time, he acknowledged that “a commitment to hold/improve profitability over this time may provide some downside support to the stock,” though he stuck with his market-perform rating.
Evercore ISI’s Peter Levine, meanwhile, said the stock’s negative reaction was “unsurprising,” though he was staying bullish on the name.
Levine’s recent channel checks turned up “sufficient evidence to suggest that there is no demand problem, no underlying shift in the fundamentals, and no new emerging competitive concerns,” he wrote. “With no apparent demand deficit, we believe [management] has enough credibility to instill some confidence in their choice to sacrifice short-term rev to pursue a strategic shift aimed at positioning the company for [long-term] growth.”
He has an outperform rating and a $405 target price on the shares.
Similarly, William Blair’s Jonathan Ho could see why investors would be worried but said the company’s pivot could create a “tectonic shift” in the cybersecurity market down the road.
“As Palo Alto gains scale, it will also have the ability to out-invest its competitors and have access to datasets across the security landscape that can serve as a sustainable competitive advantage,” he wrote.
Further, the move “could drive a potential consolidation wave in the space and place point solution vendors in a more precarious situation,” said Ho, who rates the stock at outperform.
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