Palo Alto Networks beat and raise fails to wow Wall Street. But that plays into our hand

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Don’t sweat the drop in Palo Alto Networks stock, which came despite a solid beat and raise after Wednesday’s closing bell. The cybersecurity company delivered strong fiscal 2025 first-quarter results, beating estimates on basically every line. It also raised full-year guidance across several key metrics. However, the recently rallying stock fell victim to profit-taking as the new outlook failed to satisfy lofty investor expectations. Revenue for Palo Alto’s quarter ending Oct. 31 increased 14% year over year to $2.14 billion, exceeding the consensus estimate of $2.12 billion that was compiled by LSEG. Adjusted earnings per share increased 13% to $1.56, ahead of the $1.48 expected. Palo Alto Networks Why we own it: We believe cybersecurity is a secular growth market as bad actors are relentless and companies simply cannot afford to not invest in defense. It is a never-ending arms race. We believe Palo Alto Networks, in particular, is uniquely positioned to win due to its best-in-class tools and a broad product portfolio that allows it to provide an all-encompassing “platform” solution to cybersecurity. Competitors : CrowdStrike (also a Club stock), Fortinet , Cisco Systems Last buy : Aug. 2, 2024 Initiation : Feb. 15, 2023 Club name Palo Alto also announced its board of directors approved a 2-for-1 forward stock split for shareholders of record on Dec. 12. The stock will begin trading at its new split-adjusted price on Dec. 16. Stock splits do not create value in the traditional sense but temporarily foster enthusiasm that can boost a stock price. Bottom line Palo Alto Networks is off to a strong start to its fiscal year 2025. Part of its success is due to the robust market for cybersecurity, especially with hackers using artificial intelligence. But another driver is the company’s push into platformization, the packaging of products and services across disciplines. It was only in February that management introduced this platformization push – and after some initial growing pains as Wall Street analysts caught up to the strategy shift, it looks like it’s been a big hit with customers. Backing this up notion is the addition of more than 70 new platformizations in the quarter, bringing the cumulative number of deals to about 1,100. Management believe they’re on track to hit their target of 2,500 to 3,500 platformizations by fiscal year 2030. Platformization is also leading to bigger deals. The company signed a transaction worth more than $50 million with a large technology firm, a more than $20 million deal with a financial services firm, a more than $15 million deal with a national hospital system, and a more than $30 million deal with a business services company. In total, Palo Alto Networks signed 305 deals in the quarter worth more than $1 million. That’s up 13% from the year-ago period. It also signed 60 deals total more than $5 million, up 30% year over year. PANW YTD mountain Palo Alto Networks YTD So, why is the stock 4.8% lower in after-hours trading? Palo Alto Networks passed through the fiscal first-quarter earnings beat into its full-year fiscal 2025 outlook. Fiscal Q2 guidance was roughly in line with expectations. With shares up about 33% year to date and 15% since the company last reported earnings in mid-August, we think investors were hoping for an even bigger beat and raise. We’re not worried. Palo Alto’s numbers easily show momentum in the business, and we expect more market share gains ahead from platformization. For example, there’s some industry talk that other cybersecurity companies could begin a hardware refresh cycle next year, and CEO Nikesh Arora sees this as an opportunity for customers to remove competitors’ hardware and replace it with Palo Alto Networks’ products. “We are delighted that some of our industry peers have refresh cycles because it allows our customers to say finally, I can consolidate on a single platform on Palo Alto where I only have their SASE,” Arora told Jim Cramer on “Mad Money” on Wednesday evening. SASE stands for secure access service edge, which combines security and networking into a single cloud platform. As a result of the better-than-expected quarter and raised outlook, we’re increasing our Palo Alto price target to $450 per share from $380 – implying roughly 16% upside from the stock’s closing price at the end of Wednesday’s regular trading session. Commentary Palo Alto Networks stopped providing billings guidance last quarter because management thought it was no longer as meaningful in this high interest rate environment. Management said the billings metric was not useful because of customers seeking financing options. Instead, the team wants investors to focus on the Remaining Performance Obligation, or RPO for short, because that metric represents the total value of contracted revenue yet to be delivered. The company’s RPO in its fiscal first quarter rose 21% year over year to $12.6 billion, beating the estimates of $12.48 billion and previous guidance of $12.4 billion to $12.5 billion. A second metric Palo Alto wanted investors to focus on was its Next-Gen Security ARR (average recurring revenue.) This is another subscription business term that represents the annualized revenue of all active contracts on the final day of the reporting period. NGS ARR includes revenue for Palo Alto Network’s Prisma, Cortex, QRadar, and certain cloud-delivered security services. This metric increased 40% year over year to $4.52 billion, beating the consensus estimate of $4.37 billion and well above guidance of $4.33 billion to $4.38 billion. Guidance For its fiscal 2025 second quarter, here’s what Palo Alto expects. All estimates are sourced from FactSet. Total revenue of $2.22 billion to $2.25 billion, which is in line with the $2.23 billion estimate Non-GAAP earnings per share (EPS) in the range of $1.54 to $1.56, which is in line with the $1.55 consensus estimate (GAAP stands for generally accepted accounting principles) Remaining Performance Obligation of $12.9 billion to $13 billion, which is also pretty much in line with the consensus estimate of $12.997 billion Next-gen security ARR (annual recurring revenue) of $4.70 billion to $4.75 billion, ahead of the $4.64 billion consensus estimate For the full-year fiscal 2025, management now expects the following. Total revenue of $9.12 billion to $9.17 billion, reflecting a slight raise from the prior guide of $9.10 billion to $9.15 billion. Non-GAAP EPS in the range of $6.26 to $6.39, reflecting a solid raise from the prior guide of $6.18 to $6.31 ( essentially, Palo Alto flowed through the 8 cents fiscal 2025 Q1 beat to the full-year outlook) RPO in the range of $15.2 billion to $15.3 billion, unchanged from its prior outlook Next-gen security ARR of $5.52 billion to $5.57 billion, a raise from its prior outlook of $5.42 billion to $5.47 billion Adjusted free cash flow margin of 37% to 38%, unchanged. (Jim Cramer’s Charitable Trust is long PANW. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Nikesh Arora, Chairman and CEO of Palo Alto Networks, speaking at the TEC Summit on October 29, 2019 in New York City.

Astrid Stawiarz | CNBC

Don’t sweat the drop in Palo Alto Networks stock, which came despite a solid beat and raise after Wednesday’s closing bell.

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Palo Alto Networks beat and raise fails to wow Wall Street. But that plays into our hand

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