Palo Alto is 'struggling' despite cybersecurity tailwinds

Shares of cybersecurity company Palo Alto Networks (PANW) have plummeted by its biggest single-day loss after slashing its full-year guidance. Piper Sandler Co-Head of Technology Research Rob Owens joins Yahoo Finance Live to explain why he downgraded Palo Alto's stock to Neutral and moved to "look at other names for cyber exposure".

Owens points out this is now "the third quarter in a row" Palo Alto has lowered its billings outlook. He finds this concerning given that the overall cybersecurity sector is performing "well" currently. Owens notes positive industry tailwinds like "increased disclosure requirements from the SEC" and more regulation around AI. However, he states "Palo Alto is struggling a bit" despite these circumstances.

Owens says Palo Alto stands out as "one of the few security consolidators that sits across a lot of domains." He highlights their success in firewalls, cloud security, endpoint protections, and more. But as Palo Alto expanded, so did the competition and internal headwinds now challenging the company.

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Editor's note: This article was written by Angel Smith

Video transcript

JOSH LIPTON: Shares of Palo Alto networks seeing their biggest decline ever as Wall Street turned sour on the stock. Analysts now rethinking their views and ratings on the cybersecurity company after it lowered its full year guidance. Here with more on the short and long-term trajectory for Palo Alto, let's get to Rob Owens, Piper Sandler's co-head of technology research. Rob, it is great to see you and to have you on the show. And let's just get right to it, Rob.

So Palo Alto Networks, you cut your rating, Rob, right? You go to a neutral, so you've moved to the sidelines. How come, Rob? Just walk us through the change.

ROB OWENS: Yeah. We think after the events of last night, it was appropriate to move to the sidelines, Josh. It was the third quarter in a row where we have had a lowered billings outlook from the company effectively. The first one being relative to street consensus at the end of their fiscal year. And the last two were guides down.

And the company is changing its strategy relative to go-to market. You're seeing more giving away of product and competitive situations in hoping to bring in larger deals for the long term. So what are the implications here? We took about 600 million out of our billings number. That's about 6% for the year but realize that year ends in two quarters, it's a July fiscal year, and a couple hundred million in terms of revenue.

So we've seen consistent guidance down out of Palo Alto at a time where honestly we think cybersecurity is doing pretty well, you know, Josh, if you look at the competitive landscape, if you look at what's happened from a breach perspective. Number one, we had major breaches last year with Clorox and MGM, major ransomware events. You look at increased disclosure requirements and breach disclosure requirements from the SEC itself. You look at AI and the advent of a lot of new technologies. I think cyber is probably seeing some of the best fundamentals that's ever seen.

Meanwhile, Palo Alto struggled a little bit, so we think it's appropriate to move to the sidelines and look towards other names for cyber exposure.

JULIE HYMAN: So this is really interesting, Rob, because-- it's Julie here-- the discussion that we were having offline before the show was this very question. You know, given that there are still quite a number of threats, right, cyber threats, the question was, are companies pulling back their spending for some reason? Or is it a Palo Alto issue? And so it sounds like you think it is a Palo Alto issue. Is it that their offerings are not compelling enough, they're too expensive, as you say, they're now going to be doing promotions, or something else? What is it?

ROB OWENS: Well, I-- i think it's somewhat asymmetric to look at the threat landscape on one side and the spending environment on the other, because it doesn't make sense relative to what Palo said. And I think that they've gone after successfully over the last couple of years, by the way, very large customers. And some of those customers might be feeling a little bit of indigestion relative to security.

But if you look, I think, across the broader landscape, relative to, again, the threat environment, which is as robust as I've seen it in, honestly, my 27 years of covering security, increased regulatory requirements-- you had the director of the FBI out a couple of weeks ago talking about some type of cyber-like Pearl Harbor event to come in the next nine months on critical infrastructure. If companies are pulling back on their spending right now, I actually don't think that's a good thing. And I don't think that's the honest to God truth.

So at the end of the day, I think this is somewhat asymmetric specific to Palo Alto and some of the customers that they're dealing with and a little bit of shift in strategy. Now, Palo Alto is one of those few security consolidators that sits across a lot of domains. And what I mean by that is that came up in the firewall market, they've moved into cloud, they moved into endpoint SIEM, which is Security Information and Event Management. As you know, we love our acronyms in security.

And so as Palo has gotten a lot broader, I think they've faced some headwinds definitely and some competitive headwinds. And so we're seeing the other side of that right now at a time where cyber is strong. They're getting more promotional. They're taking the numbers down and effectively telling investors, give us 12 to 18 months and things will kind of be back to normal.