Cybersecurity stocks experienced a significant downturn on Wednesday following Palo Alto Networks Inc.’s (PANW) downward revision of its full-year sales guidance, sparking concerns about broader challenges within the industry.
On Tuesday evening, Palo Alto Networks announced a reduction in its fiscal 2024 revenue forecast, now projecting a range of $7.95 billion to $8 billion, down from the previous estimate of $8.15 billion to $8.2 billion issued in November. Similarly, the company revised its total billings forecast to a range of $10.1 billion to $10.2 billion, compared to the earlier projection of $10.7 billion to $10.8 billion
CEO Nikesh Arora highlighted during a call with analysts that clients were exhibiting signs of “spending fatigue” despite the escalating online threats. He noted that customers were finding limited benefits in adding incremental products to enhance security outcomes. As a response, the company is focusing on “platformization” to facilitate deals and position itself for sustained growth in the long term.
Investor concerns were triggered by Palo Alto’s revised forecasts, leading to a sharp decline in cybersecurity stocks on Wednesday. Palo Alto’s shares plummeted by over 25%, marking their largest single-day decline since the company’s initial public offering (IPO) in 2012. Competitors Zscaler Inc. and CrowdStrike Holdings Inc. also experienced significant drops of nearly 15% and about 10%, respectively.
The cybersecurity sector had been experiencing substantial growth prior to Wednesday’s downturn. Palo Alto’s shares had more than doubled in value over the past year leading up to Tuesday’s earnings report, while CrowdStrike’s stock nearly tripled, and Zscaler’s had risen by over 90%.
Despite the market’s pessimism, analysts maintained a more optimistic outlook. Mizuho Americas Securities analysts, while lowering their price target on Palo Alto Networks (PANW) stock, reiterated their buy rating, emphasizing their bullish stance on the company’s shift towards higher-growth recurring revenue.
Similarly, Jefferies analysts expressed confidence in Palo Alto’s long-term prospects, although they acknowledged potential near-term challenges, anticipating pressure on the stock in the interim.
Regarding the broader cybersecurity industry, Jefferies analysts saw less cause for concern compared to the financial markets.
They noted that while cybersecurity fatigue might be evident in Palo Alto’s mega deals, they hadn’t observed similar trends elsewhere. Additionally, they believed that competitors like CrowdStrike Holdings Inc. (CRWD) and Zscaler Inc. (ZS) were well-positioned to meet market expectations.
As of 1:57 p.m. ET on Wednesday, Palo Alto Networks stock was trading at $266.37, down 27%. Zscaler shares were at $212.70, reflecting a 15% decline, while CrowdStrike shares had dropped 10% to $290.36.
