Cybersecurity 'still number one on the agenda in boardrooms,' Cramer says as Palo Alto reports
Shares of Club name Palo Alto Networks (PANW) have plummeted by more than 18% since the start of the month amid a broader sell-off in the cybersecurity industry. But we still expect the cyber leader to outperform peers when it reports quarterly results Friday, as it continues to benefit from platform consolidation and diverse revenue streams. Palo Alto Networks is set to release earnings for its fiscal fourth quarter on Friday after the closing bell. Analysts expect the cyber firm to deliver revenue of $1.96 billion for the three months ended July 31, compared with $1.6 billion for the same period a year prior, according to Refinitiv. On a non-GAAP (generally accepted account principles) basis, earnings-per-share (EPS) should come in at $1.28, Refinitiv data showed, compared with $2.39 a share last year. Cyber backdrop Cybersecurity companies have come under pressure since Fortinet (FTNT) on Aug. 3 reported weaker forward guidance and noted that customer deals were being delayed — sending shares tumbling 25%, with knock-on effects for Palo Alto. Following Palo Alto's subsequent unwarranted 10% drop, we upgraded our rating on the stock to a 1, or buy, from a 2 rating. Wall Street's reaction was mixed. Barclays raised its price target on Palo Alto to $275 a share, from $245, while maintaining the equivalent of a buy rating on the stock. The firm predicted Palo Alto could reach a valuation of $100 billion over the next few years, a sizeable upside from its current $65 billion market capitalization. Meanwhile, RBC Capital Markets lowered its price target to $250 a share, from $277, citing near-term industry headwinds, while reiterating a buy-equivalent rating. PANW YTD mountain Palo Alto Networks (PANW) year-to-date performance. What we're watching Palo Alto's unusual decision to release its results — and hold its post-earnings conference call — after the closing bell on Friday has some on Wall Street scratching their heads. The last instance of a company in the S & P 500 doing so was Nike Inc . (NKE), in December 2020. "A Friday earnings report is universally regarded as bad news personified...that's why I have been reduced to saying I want to see what the quarter holds before we buy," Jim Cramer said Thursday. "I suspect that there is some sort of reorganization lurking that some will regard as negative no matter what [but] I would rather default to the notion that cybersecurity is still number one on the agenda in all boardrooms," he added. In a Monday research note, Wolfe Research said the Friday reporting date "has left investors very uneasy," especially since Palo Alto's fiscal fourth-quarter report is slated to include its full-year outlook for fiscal 2025. Still, "while we don't expect the news from the field to be perfect, we remind investors that this is [CEO Nikesh Arora's] time to shine under the Friday Night Lights, and he will not go down without a fight," Wolfe analysts argued. "So while investor sentiment would have you believe that the [quarter bank] has a torn ACL, our checks indicate that it's likely a sprained ankle," they wrote. That's largely a view we share. Our main focus will be on customer spending and its impact on cash flows last quarter, along with guidance on Palo Alto's medium-term financial targets. If the company can consolidate market share on a spending pullback, it could outperform peers and be better setup when enterprise companies ultimately ramp up IT spending again. Palo Alto's edge Palo Alto has a track record of overcoming market headwinds in the long term. This past spring, for example, shares fell after negative comments from the CEO of peer Tenable (TENB) after the company reported weak forward guidance. We bought more shares of PANW on May 1 because of that weakness but, ultimately, Palo Alto stabilized and has since outperformed Tenable. In a saturated cybersecurity market, Palo Alto is the "only real soup-to-nuts cyber play ," Jim said recently, allowing it to dominate the field. The company has a more diversified and less-cyclical revenue stream than many peers. And its client base consists of larger players, meaning those customers should be better positioned to maintain spending on cybersecurity amid economic uncertainty. (Jim Cramer's Charitable Trust is long PANW. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Signage outside Palo Alto Networks headquarters in Santa Clara, California, U.S., on Thursday, May 13, 2021. David Paul Morris | Bloomberg | Getty Images