Why Palo Alto Networks' stock is having its worst day in nine months

MW Why Palo Alto Networks' stock is having its worst day in nine months

By Emily Bary

The stock is pacing S&P 500 laggards after a bearish downgrade at HSBC

Palo Alto Networks Inc. shares are leading S&P 500 decliners in Friday action, following a bearish note that flagged potential growth concerns.

HSBC analyst Stephen Bersey cut his rating on Palo Alto Networks' stock (PANW) to reduce from hold, weighing in on the cybersecurity company's oft-discussed "platformization" approach, through which Palo Alto Networks has given customers some product for free at the outset in order to drive paid adoption of a broader suite of company services down the line.

"However, measuring the success of this strategy was somewhat opaqueduring this trial period and we are not convinced that, even if successful, the additional selling of new modules would be significant enough to return revenue growth to the 20%+ levels seen in the recent past," Bersey wrote.

Accordingly, he thinks investors are looking at Palo Alto Networks "like a20%+ growth company, while a mid-teen revenue growth trajectory may be more likely." That could mean "a significant downward rerating" for the stock, meaning that investors could come to assign it a lower valuation multiple.

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"We believe the recent re-rating of the stock is linked to expectations of a strong rebound in [fiscal 2026], which may not be fulfilled," Bersey added.

Palo Alto Networks shares are down 4.9% in Friday action and tracking toward their worst single-day percentage decline since they fell 28.4% on Feb. 21, 2024. The stock is up 31% so far this year and up 44% over a one-year span, though it's now turned negative for the week.

Bersey's new target price of $291 is about 27% below Thursday's close.

The downgrade comes despite what Bersey called strong results for Palo Alto's fiscal first quarter, which the company reported earlier this week. He did note some potential positives for the company.

"We believe SIEM (security information and event management) could be a major pillar of the company's growth," Bersey wrote, pointing to Palo Alto Networks' estimation that 90% of this market is held by legacy players. The company sees opportunity to provide better technical performance than what those traditional participants offer.

-Emily Bary

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November 22, 2024 12:26 ET (17:26 GMT)

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