Shares of Palo Alto Networks (NASDAQ: PANW) turned sharply lower Wednesday morning, falling as much as 27%. As of 10:44 a.m. ET, the stock was still down 25.9%.
The catalyst that sent the cybersecurity specialist plunging was its quarterly financial report. While results were higher than expected, the company announced a serious change to its strategy that caught investors off guard.
Solid results
For its fiscal 2024 second quarter (ended Jan. 31), Palo Alto Networks’ revenue grew 19% yr over yr to $2 billion, fueled by existing customers increasing their spending. This resulted in adjusted earnings per share (EPS) that rose 39% to $1.46.
To present those numbers context, analysts’ consensus estimates were calling for revenue of $1.65 billion and adjusted EPS of $1.30, so Palo Alto Networks cleared each bars with room to spare.
Total billings — or contractually obligated sales which have not yet been booked as revenue — provide insight into the company’s future growth potential, and there appeared to be trouble on the horizon. Second-quarter billings increased to $2.35 billion, up 16% yr over yr. When billings grow more slowly than current revenue growth, this implies a possible slump in future sales.
A major strategic pivot
CEO Nikesh Arora revealed a serious shift in strategy that caught investors off guard. The company will offer increased incentives, including free product offers, in a bid to get customers to adopt more of its services and products. The resulting uncertainty had some investors running for the exits.
Consistent with its plans, management slashed its guidance. For its fiscal third quarter, executives are forecasting revenue in quite a lot of $1.95 billion to $1.98 billion, or year-over-year growth of 14% on the midpoint. The company also expects diluted adjusted EPS of $1.25. Far more troubling was projected billings of $2.33 billion, or an uptick of just 3% on the midpoint. This means a rapid deceleration in growth.
For fiscal 2024, management is forecasting revenue of $8 billion, up roughly 15% yr over yr. Palo Alto Networks expects total billings of roughly $10.15 billion on the midpoint of its guidance, which could equal growth of about 11%.
It’s a major shift in strategy, and it stays to be seen whether management can pull this off, which is why the stock plummeted.
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Danny Vena has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Palo Alto Networks. The Motley Idiot has a disclosure policy.
Why Palo Alto Networks Stock Crashed Wednesday Morning was originally published by The Motley Idiot