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Despair Overblown as Palo Alto Networks Maintains Strong Demand Despite Billing Downgrade

4.3

Andrew R. Michaud

November 16, 2023

Despite a downgrade from one analyst, many others over the past day said the despair from investors was unfounded, and echoed commentary from the company that demand was still strong, amid what executives called an “unprecedented level” of data breaches.

Palo Alto Networks PANW, -6.12% recently adjusted its full-year billings outlook to a range of $10.7 billion to $10.8 billion, down from the previous range of $10.9 billion to $11 billion.

Executives explained that this revision was a response to customer demands for more flexibility in payment methods for Palo Alto's security services. Customers are seeking discounts, deferments, and shorter-length deals as they navigate higher interest rates and an uncertain economic landscape that has dampened tech spending for over a year.

Despite a 6.3% drop in share value on Thursday, at least two analysts dismissed the downgrade and subsequent sell-off as mere "noise."

Wedbush analysts, in particular, emphasized the need to look beyond the temporary billing setback and focus on the broader picture. They maintained that demand for Palo Alto's services remained "rock solid."

According to Wedbush analyst Daniel Ives, "The Street naturally was hyper-focused on the billings number seen this quarter, which we believe was a slight overreaction from the Street when looking into Palo Alto’s overall business." He added, "Similar to our checks, the company is seeing strong demand in the market; however, they are guiding to a more conservative billings number with customers asking for more deferred payment terms given the duration of deals."

Palo Alto Networks Outlook Continues to Generate Diverse Opinions

Analysts have recently shared differing views on Palo Alto Networks' latest financial results. Stifel, one of the firms, considered the shorter billings to be insignificant noise, consistent with industry peers such as Fortinet Inc. and Check Point Software. They maintained their positive outlook on Palo Alto's strong positioning and growing cybersecurity platform. According to them, Palo Alto has various factors in place to sustain high-teens top-line growth and expand their operating margin and free cash flow in the coming years.

Wells Fargo, however, believed that the focus on billings trends detracted from all the positive aspects of the company. Evercore analysts, too, disregarded Palo Alto's outlook as being a macro-level distraction.

Despite a healthy quarter, BofA Securities downgraded its rating of Palo Alto Networks to neutral due to concerns about shorter deals sought by its customers. The analysts deemed this phenomenon to be more than a one-time occurrence after financing significantly impacted Palo Alto's billings in recent quarters. As financing gained momentum and macroeconomic conditions weakened, customers demanded greater discounts in exchange for three-year deals.

It's worth noting that Palo Alto Networks' shares have performed impressively throughout the year, experiencing a 74.6% increase year-to-date compared to the S&P 500 index's 17.7% growth over the same period.