Palo Alto Networks Inc (PANW) reports earnings Thursday after the close, and it will be one of the more closely watched reports of the week.
While shares of PANW are down 29% this year, the stock could still fall much lower with a bad report. And that’s why PANW is being watched so closely right now, and why it is a huge investment risk at the moment.
Palo Alto has suffered in 2016 behind both a bearish market and conflicting reports related to its business. At the end of last year, FBR Capital cited PANW as a major beneficiary of robust deal momentum and upgrades to next-generation firewall and security software by government and enterprises alike.
But shortly after, Cleveland Research noted moderating growth after channel checks, reducing its growth outlook to a 30% to 40% range against expectations for 40% growth.
Beyond that, Palo Alto has remained a battleground stock, one where both bulls and bears continue to plead their cases. Wells and D.A. Davidson are two firms that have been supported PANW as a best-in-class security play with market share gains, whereas others like JMP Securities point to decelerating spending and growth from channel checks.
Therefore, the question becomes whether PANW can gain enough market share in the next-generation firewall and security software industry to counter a decline in overall growth. According to a survey from Piper Jaffray, Palo Alto is in fact stealing market share from Cisco (CSCO), Juniper (JNPR), and Check Point (CHKP), but no one knows whether or not that stolen market share will lead to revenue of $318 million and an EPS of 39 cents, up 46% and 105%, respectively. This unknown has created significant risk in PANW shares.
PANW: Not a Good Idea to Buy Now
All things considered, unless you have a giant appetite for risk, there is no reason to buy PANW either ahead of its fiscal second quarter report or afterward. Fact is, industry sentiment remains low, and until the market recovers, historically volatile stocks like Palo Alto’s are going to suffer.
Specifically, a decline in overall industry growth is the same thing that crippled FireEye (FEYE) last year and into 2016, despite market share gains in the malware-prevention and advanced persistent threat industries. FireEye has guided for organic billings growth of 20% this year; the Street, however, expects billings growth of 26%, and the company is expected to grow overall revenue of nearly 35%. In comparison, PANW is expected to grow revenue 43% this year, and many believe that outlook is too aggressive.
In the event that PANW lowers guidance, or issues conservative guidance that implies growth closer to 40% or below, then it could still have a long ways to fall. Currently, shares of PANW stock are trading at more than eight times FY2016 revenue expectations, while FEYE trades at just three times FY2016 expected revenue.
So theoretically, PANW could trade a lot lower if it does not impress Wall Street in a big way. Based on the conflicting information coming from analysts, it is not a bet I would want to take right now.
As of this writing, Brian Nichols was long FEYE stock.
