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Palo Alto Networks Sinks on Guidance Again. Time to Buy or Stay Away?

Palo Alto Networks (PANW 0.93%) shares traded 6% lower following the company’s fiscal third-quarter earnings report, although the drop was relatively calm compared to the nearly 30% drop the stock saw when it reported its fiscal second-quarter results in February.

Let’s look at the cybersecurity company’s most recent results, whether its new strategy is showing signs of working, and whether it’s time to buy the stock.

Billing guidance disappoints investors

Palo Alto reported solid fiscal Q3 results, with revenue climbing 15% to $2 billion. Adjusted earnings per share (EPS), meanwhile, rose 20% to $1.32. Both revenue and earnings topped consensus analyst expectations.

Looking ahead, the company forecast fiscal fourth-quarter revenue to come in between $2.15 billion and $2.17 billion, representing growth of between 10% and 11%. Meanwhile, it was looking for billings to grow by 9% to 10% to between $3.43 billion and $3.48 billion. It guided for adjusted EPS of between $1.40 and $1.42.

For the full fiscal year, it sees revenue growth of 16% to between $7.99 billion and $8.01 billion, and billings growth of 10% to 11% to between $10.13 billion and $10.18 billion. Adjusted EPS is projected to be $5.56 to $5.58 for the full year.

The biggest issue for investors was Palo Alto’s billings guidance, which can be an indicator of future growth. After the company slashed its full-year billings guidance by $600 million in February, investors were likely hoping for a rebound. However, the company narrowed its forecast from the $10.1 billion to $10.2 billion guidance it gave in February.

Palo Alto defended its booking guidance, saying that the number was impacted by more customers moving to annual billing plans. It said that billings were not a true indicator of current business trends and that implied bookings went up. The difference between the two is that billings are the invoiced amounts for the current billing period, while bookings are the amount owed over the life of the contract. Whether a customer is billed monthly, quarterly, or annually can impact the billings number.

In February, though, Palo Alto said that its cybersecurity customers were seeing “spending fatigue,” and it embarked on a big change in strategy implementing what it called a platformization plan. But in order to shift customers from using point solutions to its entire platform, it began offering them free use of its services for the duration of its contracts with other providers so they would not be paying twice. It said this would have a negative impact on its revenue and billings over the next 12 to 18 months.

On its most recent earnings call, the company said that the strategy is beginning to take shape. It said feedback from customers has been encouraging and that it has had more conversations with customers about its strategy than expected. It noted that 900 of its top 5,000 customers are fully platformized, with 65 new additions in the quarter. The opportunity is big, as fully platformized customers generate between $2 million and $14 million in annual recurring revenue (ARR), while its average next-generation security ARR for other customers is $200,000 to $300,000.

Time to buy the stock or stay away

Palo Alto’s fiscal third-quarter results did little to change either its medium-term or longer-term trajectory. The rest of this fiscal year and next will remain a transition period for the company as it looks to move point solution customers over to one of its three main cybersecurity platforms while absorbing some costs to do so in the process.

Ultimately, this should be the right move for the company and should offer it a bigger opportunity over the long run. However, the next year or so could be more difficult, and Palo Alto Networks needs to show that its strategy is working.

Trading at nearly 13 times its fiscal 2024 revenue (price-to-sales ratio) and over 11 times its fiscal 2025 revenue, Palo Alto stock is not exactly in the bargain bin.

PANW PS Ratio (Forward) data by YCharts

Given the stock’s high valuation and current transition period, I see no need to rush into the stock at this time. However, I think investors can revisit the stock either at a cheaper valuation or closer to when its transition period should begin winding down. As such, I’d stay away from the stock for now while looking for a better entry point.

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