Palo Alto Delivers Another 'Messy' Quarter

UBS downgraded Palo Alto Networks Inc PANW to Neutral from Buy as the company’s second quarter results were marred by execution issues and marked its third set of “messy” quarter in the last four.

Palo Alto reported second quarter revenue/non-GAAP EPS well below consensus and guided third quarter below Street. The disappointing results led the company to lower outlook to flat product growth (from +12-13 percent year-over-year).

Palo Alto also cut F2017 revenue growth guidance to 25 percent from 30-31 percent and non-GAAP EPS view to $2.45-$2.50 from $2.75-$2.80.

Following the weak quarterly print and tepid outlook, shares plunged more than 20 percent, pricing in the now anemic and de-risked FY growth.

“But a sustained stock rebound is likely to be stifled by nebulous conviction on the extent of outperiod growth recovery and skepticism on prior MT/LT financial targets in our view, given the Mar'17 analyst day has now been postponed,” analyst Fatima Boolani wrote in a note.

Related Link: Here's Why Citron's Andrew Left Sees Palo Alto Going To $170

Palo Alto is facing strong competition from Cisco Systems, Inc. CSCO, while other peers Check Point Software Technologies Ltd. CHKP and Fortinet Inc FTNT too capped off strong CY16s.

Boolani, who cut her price target to $130 from $160, says Cisco’s improved execution would make it tough for Palo Alto to gain share. The analyst said it's unlikely for the company to get to 30 percent operating margins in the next two years as she models only +200bps of expansion a year from current 20 percent levels.

That said, Boolani remains positive on Palo Alto’s ability to outgrow the firewall market by min. 2x – given the company has just about 40,000 customers in contrast to peers' ranging from 150-300,000. But, the growth rate is likely to be more moderate given stronger competition.

The analyst noted the company must iron out its go-to-market mechanisms to better address its broadened portfolio, and aggressively enable/sell into its growing installed base.

“What has now emerged as a pattern of inconsistent execution and stark decel optics, we see PANW's heretofore premium valuation as likely impaired, with a re-rating contingent on multiple Qs of growth reacceleration and "clean" results,” Boolani added.