A downbeat forecast from Palo Alto Networks (NASDAQ:PANW) sent the whole cybersecurity sector down.
The company’s results beat estimates, but it guided toward slowing growth in earnings and revenue.
In response, other cybersecurity stocks also fell heavily overnight. Zscaler (NASDAQ:ZS) fell nearly 11%. Crowdstrike (NASDAQ:CRWD) fell 10%, and Fortinet (NASDAQ:FTNT) fell 7%. Palo Alto itself plunged nearly 25% and opened today at $275 per share, a market capitalization of $86 billion.
Leading Downward
Palo Alto said it earned $1.75 billion, $4.89 per share fully diluted, on revenue of $1.97 billion, in its second quarter report. The results were helped by a $1.61 billion benefit on income taxes.
But it was the outlook that spooked investors. The company projected billings will grow 10-11%, to $10.1-10.2 billion. Revenue was estimated at $7.95-8 billion.
Analysts called the results disappointing. Keybanc dropped its price target on the stock to $380 per share.
Palo Alto CEO Nikesh Arora said the outlook was based on Palo Alto’s own decision to become a full security platform, not a lack of demand. The company is forging ahead with plans to add artificial intelligence (AI) to its offerings.
Palo Alto is considered the cybersecurity leader, so its sniffles gave the whole sector a cold. Even stocks that are somewhat outside security fell. Okta (NASDAQ:OKTA), which does identity management, was down 3% overnight.
Arora’s guidance indicates the industry is going through a transition because of AI. Firewalls and other point solutions are out. The aim is now to use AI to anticipate attacks and make each cybersecurity player an exclusive supplier to its customers.
In the end, this might benefit Palo Alto as the industry leader. But the rising costs and uncertain future mean investors are stepping away until they see how things go.
Cybersecurity Stocks: What Happens Next?
Palo Alto’s new lower price may be the opportunity long-term investors have been looking for to get in. But you’re still paying over 10 times revenue if you buy it today.
As of this writing, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
