Cybersecurity giant Palo Alto Networks (PANW) experienced a turbulent week, with shares plummeting 30% after its latest earnings report – a record-breaking one-day drop.
The end result was Palo Alto’s stock plummeting from nearly $380 to $260. The culprit? Lowered revenue expectations and a strategic shift towards”platformization.” Management cautioned investors its full-year billings guidance will now come in at $10.2 billion compared to a prior outlook of $10.8 billion. Similarly, revenue guidance was revised from $8.2 billion to $8 billion.
The strategic shift, coupled with a disappointing outlook, has introduced uncertainty among investors. By contrast, other tech firms like Nvidia (NVDA) made it clear to investors in its highly anticipated Q4 report it offers a clearer growth profile.
However, beyond the initial shockwaves, lies a more nuanced picture with potential long-term opportunities.
Here are 3 reasons why Palo Alto might still be worth considering after the dip:
Reason No.1: Growth engine still roaring
Let’s be clear: the earnings miss stung. But despite the stumble, Palo Alto remains a growth company at its core.
Second-quarter revenue beat analyst estimates and grew 19% year-over-year, showcasing continued momentum. While lowered guidance suggests near-term pressure, the company’s long-term growth trajectory remains positive.
Here’s why: Platform Power. Palo Alto’s pushing customers to use multiple products (platforms), and it’s working.
The company’s strategic platformization holds promise, with customers using multiple platforms demonstrating significantly higher lifetime value, potentially fueling future growth.
Customers using two platforms exhibit a 5x increase in lifetime value compared to single-platform users. This value jumps to 40x for users of three platforms.
And Palo Alto is offering more incentives, such as free products to continue its push toward platformization.
So despite the recent hiccup, Palo Alto’s core growth story remains intact.
Reason No. 2: AI still promises to be the next major growth driver
Broader economic concerns, such as rising interest rates and potential recessionary fears, dampen investor sentiment and cast a shadow over technology stocks like Palo Alto.
However, artificial intelligence remains a bright spot.
Palo Alto’s pioneering use of AI in security products is a game-changer. Its innovative XSIAM platform generates $100 million in annual recurring revenue, showcasing the financial impact of AI in security. Notably, Palo Alto is the first AI security company to hit this milestone.
And it’s not just about revenue: AI is also helping Palo Alto slash its own service costs by 50%, with plans to automate 90% of manual interventions.
This first-mover advantage, coupled with cost-saving benefits from AI-driven automation, positions them well to capture a growing market and improve efficiency.
Reason No. 3: Short-term pain for long-term growth
The lowered expectations reflect concerns about a broader cybersecurity spending slowdown. In response, Palo Alto has introduced aggressive incentives, such as offering products at half price for the first year. The goal here is to secure long-term customer satisfaction and commitment.
While this might seem risky, it’s a strategic move to lock in long-term, multi-year deals, securing future revenue streams. This bold approach to market share growth could pay off in the long run.
The company has the balance sheet to support such contracts, which will ultimately allow it to lock in long-term, multi-year deals.
Bottom Line
Palo Alto’s recent dip was undoubtedly painful. However, the company’s strong fundamentals, strategic platformization, AI-powered advancements, and aggressive growth initiatives paint a brighter long-term picture.
Given the long-term potential, investors may find Palo Alto an attractive addition to their portfolios after performing due diligence.
