Palo Alto Networks Inc (NYSE:PANW) shares are plunging this morning amid heavy selling. Blame for the mass exodus lies with the cyber security firm’s latest earnings release, which obviously disappointed the Street. Palo Alto reported $398 million in revenue along with 55 cents earnings per share. PANW stock is off 13% as a result.
While the earnings bested estimates, revenue came in below expectations. Apparently, investors are focusing more on PANW’s revenue miss (or perhaps forward guidance) than the earnings beat.
This entire episode is a prime case study on the fickle nature of earnings announcements. Even if you could accurately forecast quarterly earnings to the penny, there’s no way to tell how temperamental traders will react. Guessing the earnings gap direction has been and will always be a 50/50 proposition.
Moving forward, PANW stock belongs in the doghouse until proven otherwise. Today’s bloodbath is delivering significant technical deterioration. Palo Alto entered the earnings release sitting above all major moving averages. Now it’s exiting the quarterly ritual beneath them.
If you’re looking for potential support, consider the $130 zone your first target. This level halted last quarter’s earnings gap and kicked off the three-month run that terminated last night.
Longer-term bulls viewing today’s dive as a buying opportunity in Palo Alto stock should exercise patience. Wait for signs of a bottom to develop before snatching up shares.
The Post-Earnings Trade on PANW Stock
If you think the pain persists for PANW in the weeks ahead, consider buying a January 140/130 bear put spread for $3.95. The vertical spread consists of buying to open the Jan 140 put while selling to open the Jan 130 put. The max loss is limited to the initial $3.95 debit and will be forfeited if PANW stock sits above $140 at expiration.
The max gain is limited to the distance between strikes minus the net debit, or $6.05, and will be captured if the stock falls below $130 by expiration.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.