For cybersecurity firm Palo Alto Networks (NYSE:PANW), its market return of 22% year-to-date only tells half the tale. Throughout much of 2019, PANW stock has incurred several hair-raising events, including precipitous drops. However, each time, shares have recovered. Could we therefore expect a repeat performance this time around?
In late November, Palo Alto Networks stock took a beating following its fiscal first quarter of 2020 earnings report. On the surface, several factors actually went right for the cybersecurity specialist. For instance, analysts expected non-GAAP earnings per share to come in at $1.03, but PANW beat expectations with an EPS of $1.05.
On the revenue front, consensus forecasts called for $767.8 million. However, Palo Alto rang up $771.9 million, which was also nearly 18% higher than its year-ago quarter sales. So, why then did PANW stock tumble nearly 12% the following session?
It all came down to a disappointing earnings outlook for PANW’s fiscal full year 2020. While Wall Street was expecting EPS of $5.07, management guided down to a range between $4.90 to $5. That didn’t sit well with analysts and the investor community, in part because the underlying cybersecurity industry should be lucrative.
Primarily, digital security measures represent a relevant need for every industry. We’ve seen enough high-profile incidents, ranging from the Equifax (NYSE:EFX) data breach to the hack attack against embattled retailer Macy’s (NYSE:M) to realize that no institution is safe. On merely this factor, investors had higher hopes for Palo Alto Networks stock.
At the same time, the cybersecurity industry is increasingly competitive. Therefore, investors may have worried that PANW stock was losing its edge against hungrier rivals.
Still, I believe that contrarians should give this name another look.
A Massive Market Supports PANW Stock (and Friends)
Despite the crowded arena in cybersecurity, that alone shouldn’t deter prospective buyers from Palo Alto Networks stock. For example, industry experts believe that the global cybersecurity market should reach $300 billion in valuation by 2024. Although I’m not about to argue with this figure, a possibility exists that it could be understated, providing more than enough room for the major players.
Principally, I say this because this market touches every industry of importance. One of the most high-profile sectors is finance. Given the digitalization of our transactions, the importance of network security only rises exponentially. Here, I’m not just talking about buying stuff on Amazon (NASDAQ:AMZN). Instead, areas such as mobile banking are gaining prominence as physical cash usage declines. Naturally, this societal trend bodes well for PANW stock.
But even in politics, the need for data security – which doesn’t necessarily have direct financial implications – has become increasingly relevant. With a vital election coming up next year, cybersecurity will again dominate the news.
However, a major catalyst for PANW stock that doesn’t always get much attention is the 5G rollout. While the telecom innovation will break new ground for internet speeds and connectivity, the same can be said for cyberattacks. For one thing, a higher user base unfortunately facilitates a larger attack surface, according to several concerned businesses.
Second, more devices, especially those associated with the burgeoning Internet of Things, creates new security hazards. In all likelihood, we’re only scratching the surface in terms of conceptualizing possible threats. As is usually the case, more technology opens the door for more bad actors to exploit.
Obviously, this is a fear that keeps business leaders up at night. But for stakeholders of Palo Alto Networks stock, it’s music to their ears.
An Opportunity in the Cloud
Another factor to consider for PANW stock is the emergence of cloud computing. Based on the term’s prominence in the media, it’s easy to believe that most companies have unreservedly embraced the cloud. But that may not be the case at all.
According to commercial property company Savoy Stewart’s survey on U.S. institutional trust of cloud computing, a surprising number of organizations are distrustful. For instance, the healthcare and insurance industry had the highest levels of distrust toward the cloud. Also fear of data leaks was cited among the majority of surveyed industries.
That’s a sharp contrast to the bullish cloud narrative that we’ve all heard. However, it’s also a long-term opportunity for Palo Alto Networks stock. While many corporations may want to integrate cloud computing for their infrastructural needs, security concerns may prevent them from taking the plunge. But this provides an education and evangelism opportunity for PANW, potentially opening further revenue channels.
Finally, I believe investors should consider the technical resilience of PANW stock. It has bounced back from volatile sessions for a reason: digital trends inevitably make Palo Alto’s services relevant in perpetuity. If you’ve got the patience to ride out some turbulence, this is an easy long-term buy.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
