Why Palo Alto Networks Stock Sank Today
Key Points
Palo Alto Networks reported sales and earnings beats for fiscal Q2.
The company issued very strong sales guidance, but its earnings forecasts missed the mark.
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Despite bullish momentum for the broader market, Palo Alto Networks (NASDAQ: PANW) stock got hit with a substantial pullback in Wednesday's trading. The cybersecurity company's share price closed out the day down 6.8% and had been off as much as 10%. The S&P 500 rose 0.5%, and the Nasdaq Composite jumped 0.7%.
Palo Alto Networks published its fourth-quarter results after the market closed yesterday and actually delivered sales and earnings that came in above Wall Street's targets. Unfortunately, investors weren't satisfied with management's forward guidance.
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Palo Alto posted strong growth last quarter
Palo Alto made a non-GAAP (adjusted) profit of $1.03 per share on sales of $2.59 billion in the second quarter of its current fiscal year -- which ended Jan. 31. For comparison, the average analyst estimate had called for adjusted earnings of $0.94 per share and revenue of $2.58 billion.
Palo Alto Networks continued to see strong expansion for its next-generation security segment, with sales increasing 33% year over year to reach $6.3 billion. The performance pushed overall revenue up 14.6% year over year, and margins for the period were also stronger than anticipated. On the other hand, management's forward guidance suggests that margins could soften in the remainder of the year.
Investors aren't happy with Palo Alto's earnings forecast
For the current quarter, Palo Alto is targeting adjusted earnings per share between $0.78 and $0.80 -- significantly below the average analyst estimate's target for per-share earnings of $0.92. On the other hand, sales are projected to be between $2.941 billion and $2.945 billion -- far above Wall Street's previous target for sales of $2.6 billion.
The trend persists with the company's full-year guidance. Palo Alto expects to post adjusted earnings between $3.65 and $3.70 on sales between $11.28 billion and $11.31 billion. Meanwhile, the average analyst estimate had called for adjusted earnings per share of $3.85 on revenue of $10.5 billion. With projected earnings coming in well below expectations despite sales being far better than anticipated, investors are reevaluating Palo Alto's long-term earnings outlook.
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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
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