Palo Alto Networks Stock Downgraded: Analyst Predicts 30% Drop

On Monday, Palo Alto Networks Inc. (PANW) faced a negative forecast from Guggenheim, as analyst John DiFucci updated his position on the company’s stock to "sell." He cited concerns over decreasing growth metrics and necessary financial adjustments as reasons for this outlook.

What Happened: DiFucci from Guggenheim voiced his doubts about the future growth of Palo Alto Networks, despite a significant 40% increase in stock price since February. He lowered the stock rating from "neutral" to "sell" and established a price target of $130, which is nearly 30% lower than its present value, according to MarketWatch.

The analyst pointed out that Palo Alto Networks has experienced five quarters in a row of declining new annual recurring revenue (ARR), which is a crucial metric for assessing business growth and stability. Moreover, he remarked that the adjusted free cash flow margins, when accounting for acquisition expenses and stock buybacks, are closer to 25%-26% instead of the higher 37%-38% that is often reported, although he still considered this figure to be "respectable."

DiFucci also scrutinized the company’s "platformization" strategy, which aims to increase product adoption by offering free services. While he recognized the rationale behind this approach, he questioned its originality, noting that similar strategies have been utilized within the industry over many years.

Why It Matters: The downgrade comes at a time when Palo Alto Networks is still focusing on its platformization strategy, which was a key talking point during its fiscal first-quarter earnings call in November. The company posted a year-over-year revenue growth of 14%, amounting to $2.14 billion, which exceeded analyst estimates, alongside adjusted earnings per share of $1.56, also better than expectations.

CEO Nikesh Arora stressed the importance of this strategy, stating, "Our Q1 results reinforced our conviction in our differentiated platformization strategy." Looking forward, Palo Alto Networks forecasts its second quarter fiscal 2025 revenue to be between $2.22 billion and $2.25 billion, with expected adjusted earnings per share ranging between $1.54 and $1.56. However, the downgrade and the accompanying assessment may affect investor perception and potentially apply pressure on the stock price in the short term.

Price Action: According to Benzinga Pro, Palo Alto was down by 0.74% in pre-market hours on Tuesday.

PaloAlto, Stock, Downgrade