Shares of Palo Alto Networks Inc. fell. To its worst day ever as Wall Street worried about the strategic pivot that is expected to deliver results in the near term.
That represents Palo Alto Networks' worst single-day percentage decline in its history. The previous record was a 24.2% drop, which occurred on March 1, 2017.
See also: Palo Alto Networks' weak outlook weighs on cybersecurity stocks. Should investors be worried?
“Palo Alto Network’s shift toward platformization, consolidating point products into one of its three platforms, raises concerns about the potential for a slower path to achieving the company’s goals,” Rosenblatt Securities analyst Katherine Trebnick wrote. “This strategic move could have several near- and medium-term impacts on stakeholders.”
Trebnik, who downgraded the stock to neutral from buy on Wednesday, noted that the move could leave channel partners frustrated “by having to sell more products within the same budget constraints.” Additionally, it may take time to train sales teams on new messaging.
Meanwhile, Palo Alto Networks is also trying to position itself as a leader in the AI space, but “platform adoption of AI may entail higher investments, which could impact margins,” Trebnick said, lowering the price target to $265 from $290.
Piper Sandler's Rob Owens also downgraded the stock, writing that Palo Alto Networks was “creating a significant degree of investor panic” for the third straight quarter.
The company “is the largest player in this sector, hopes to accelerate this situation, and will take an aggressive approach in offering a free product with the promise of long-term platform contracts,” Owens said. “This should negatively impact the business for 12 to 18 months – removing $600 million from billing estimates in the last half of this year.”
While he still sees long-term opportunity for the company, Owens said “the steps taken this quarter undoubtedly create uncertainty in the narrative as execution risks are high under current plans.”
He moved to a Neutral rating on the stock from his previous Overweight stance, while lowering his price target to $300 from $350.
John DiVucci of the Guggenheim Museum said 12 to 18 months is a long time for investors to wait, and said the term “platform” when describing it “sounds like what they've been doing all along,” except that Palo's Alto Networks will now provide customers with a “bridge” where They add additional products and move away from old products.
“We don't blame PANW for doing what they believe is the right thing for the company in the long run,” DiFucci wrote, but he has questions about why other companies would “embark on similar paths of consolidation without having to give up product for themselves.” “One time” and why Palo Alto Networks made this “big change on a quarterly conference call when results are weak,” instead of six months ago when the company hosted an earnings call on Friday evening.
DiFucci rates the stock as Neutral.
“It will need evidence that this sudden pivot is about to lead to an acceleration,” Raymond James analyst Adam Tindle said in a note to clients titled: “Yellow flags turn red.”
“While the stock is about to be punished, and we are not hawkish in our views, we are struggling with the near- and medium-term investment case from here,” he wrote. “Keep in mind that Palo is suddenly pushing a strategy whereby customers get free products in exchange for committing to integrating on the platform, however our downgrade indicates a general skepticism in the channel, and we doubt these partners will push for further integration with the vendor as they generally struggle with trust.”
At the same time, he acknowledged that “a commitment to maintain or improve profitability during this time may provide some downside support to the stock,” though he stood by his market performance rating.
Meanwhile, Evercore ISI's Peter Levine said the negative reaction to the stock was “unsurprising,” although he remained upbeat on the name.
Recent channel checks showed “sufficient evidence to suggest there is no demand problem, no fundamental shift in fundamentals, and no new emerging competitive concerns,” Levin wrote. “With no apparent shortfall in demand, we believe [management] Has enough credibility to instill some confidence in their choice to sacrifice short-term review to pursue a strategic transformation aimed at positioning the company for the better [long-term] growth.”
He has an outperform rating and a $405 price target for the shares.
Likewise, William Blair's Jonathan Ho could understand why investors were concerned, but said the company's transformation could create a “seismic shift” in the cybersecurity market in the future.
“As Palo Alto increases in size, it will also have the ability to out-invest its competitors and acquire data sets across the security landscape that can serve as a sustainable competitive advantage,” he wrote.
Moreover, the move “could lead to a potential wave of consolidation in the space and put point solutions vendors in a more precarious position,” said Ho, who rates the stock as outperform.
