Palo Alto Networks’ inventory sinks towards worst day on document upon ‘abrupt pivot’

If the Wednesday morning motion carried by way of to the shut, it will mark the worst one-day share drop for Palo Alto Networks in its historical past. The present document is a 24.2% plunge, which came about on March 1, 2017.

“Palo Alto Network’s shift in the direction of platformization, consolidating level merchandise onto certainly one of their three platforms, raises issues concerning the
potential for a slower path to attaining the company’s targets,” wrote Rosenblatt Securities analyst Catharine Trebnick. “This strategic transfer may have a number of near-term and mid-term impacts on stakeholders.”

Trebnick, who downgraded the inventory to impartial from purchase Wednesday, famous that the transfer may make channel companions pissed off “by having to promote extra merchandise inside the similar funds constraints.” Moreover, it may take time to coach the gross sales groups on the brand new messaging.

In the meantime, Palo Alto Networks can also be attempting to place itself extra as an artificial-intelligence chief however the “platform’s reliance on AI could necessitate greater investments, doubtlessly impacting margins,” Trebnick continued, as she minimize her value goal to $265 from $290.

Piper Sandler’s Rob Owens additionally downgraded the inventory, writing that Palo Alto Networks was “creating a big diploma of investor consternation” for the third consecutive quarter.

The corporate “is the most important platform participant within the phase and, in hopes to speed up that positioning, will take an aggressive method in providing free product with the promise of longer-term, platform contracts,” Owens defined. “This could negatively affect the enterprise for 12-18 months — eliminating $600M from billings estimates within the again half of this yr.”

Whereas he continues to see long-term alternative for the corporate, Owens mentioned “the steps taken this quarter undoubtedly elevate uncertainty within the narrative as execution threat is elevated beneath present plans.”

He moved to a impartial score on the inventory from his prior obese stance, whereas reducing his goal value to $300 from $350.

Guggenheim’s John DiFucci mentioned that 12 to 18 months is a very long time for traders to attend, and he argued that the time period “platformization,” when described, “feels like what they’ve been doing all alongside,” with the exception being that Palo Alto Networks will now provide prospects a “bridge” as they add further merchandise and transition away from legacy ones.

“We don’t blame PANW for doing no matter they imagine is the proper factor for the corporate over the long run,” DiFucci wrote, however he has questions on why “different corporations embark on comparable paths of consolidation with out having to provide away product for a time” and why Palo Alto Networks delivered this “main change on a quarterly convention name when outcomes are weak,” quite than six months again when the corporate hosted a Friday night earnings name.

DiFucci charges the inventory at impartial.

Raymond James analyst Adam Tindle mentioned he’ll “want proof that this abrupt pivot is poised to yield acceleration,” in a be aware to purchasers titled: “Yellow Flags Grow to be Purple.”

“Whereas the inventory is poised to be punished, and we’re not dogmatic in our views, we battle with the close to/intermediate time period funding case from right here,” he wrote. “Contemplate, Palo is abruptly pushing a method whereby prospects will obtain free merchandise for a dedication to consolidate on the platform, but our downgrade cited basic skepticism within the channel, and we doubt these companions will push an extra consolidation with a vendor the place they typically battle with belief.”

On the similar time, he acknowledged that “a dedication to carry/enhance profitability over this time could present some draw back assist to the inventory,” although he caught along with his market-perform score.

Evercore ISI’s Peter Levine, in the meantime, mentioned the stock’s unfavorable response was “unsurprising,” although he was staying bullish on the identify.

Levine’s latest channel checks turned up “enough proof to counsel that there isn’t any demand drawback, no underlying shift within the fundamentals, and no new rising aggressive issues,” he wrote. “With no obvious demand deficit, we imagine [management] has sufficient credibility to instill some confidence of their option to sacrifice short-term rev to pursue a strategic shift geared toward positioning the corporate for [long-term] development.”

He has an outperform score and a $405 goal value on the shares.

Equally, William Blair’s Jonathan Ho may see why traders can be anxious however mentioned the company’s pivot may create a “tectonic shift” within the cybersecurity market down the highway.

“As Palo Alto features scale, it’ll even have the power to out-invest its rivals and have entry to datasets throughout the safety panorama that may function a sustainable aggressive benefit,” he wrote.

Additional, the transfer “may drive a possible consolidation wave within the house and place level answer distributors in a extra precarious scenario,” mentioned Ho, who charges the inventory at outperform.