Why Palo Alto Networks Stock Dropped on Wednesday

Palo Alto Networks (NASDAQ: PANW) investors just cannot catch a break. Over the past three days, this cybersecurity stock has been downgraded by three separate investment bank analysts, beginning with Guggenheim cutting the stock to sell on Monday, followed up by Deutsche Bank cutting the stock to hold on Tuesday, and (hopefully?) ending with a downgrade to neutral by BTIG this morning.

Each successive downgrade has cost Palo Alto stock a few more points of market capitalization. Today, the stock fell 4% to about $168.50 as of 12:40 p.m. ET.

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Why Wall Street hates Palo Alto stock

New annual recurring revenue (ARR) at Palo Alto "has declined in each of the last five quarters," according to a Guggenheim note cited on The Fly on Monday, and momentum is "softening." Despite this negative trend, Palo Alto shares enjoy "lofty investor expectations," says Deutsche Bank. Although Palo Alto shares are currently lagging the S&P 500's returns, Guggenheim notes the stock is up 40% off its February 2024 lows.

Why did investors love Palo Alto stock last year, and why are they falling out of love today? BTIG notes that until recently, it thought Palo Alto could achieve "sustainable 15%-plus growth." Now, BTIG is losing confidence that Palo Alto can grow so fast, and warns that to the contrary, Palo Alto's growth could "decelerate at a faster than expected pace in fiscal 2026 and 2027."

Is Palo Alto Networks stock a sell?

Indeed, the situation could be even worse than what these three analysts are saying. Reviewing estimates from the more than four dozen analysts who follow Palo Alto stock, S&P Global Market Intelligence notes the consensus forecast for Palo Alto is 24% long-term earnings growth -- not just 15%.

Palo Alto's current valuation of more than 42 times earnings seems stretched if all it can grow at is 24%, and more stretched at 15%. If the stock ends up growing even slower than that, it's going to look very expensive indeed. When that happens, investors will probably start selling -- maybe even more than they're already selling it today.

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Rich Smith has positions in Palo Alto Networks. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.