Shares of Palo Alto Networks (PANW 5.33%) dropped over 25% this week, according to data from S&P Global Market Intelligence. The cybersecurity giant dropped its revenue and billings guidance for fiscal year 2024, causing analysts to lower their price targets. Shares of Palo Alto Networks have soared in the past year with more and more cybersecurity threats emerging and government mandates in places like the U.S. Despite this recent drop, Palo Alto Networks stock is up 50% in the last 12 months.
Slowing growth, lowered guidance
In its second quarter, Palo Alto Networks’ revenue grew 19% year over year to $2 billion. The company is not very profitable, posting just $54 million in operating income last quarter, but it has a huge opportunity ahead of it with the continued need for cybersecurity from companies and government agencies.
The problem is, this opportunity has created massive expectations in Palo Alto Networks stock. Expectations were not met this quarter as the company lowered its revenue and billings guidance for fiscal year 2024. It now expects total billings in the range of $10.1 billion-$10.2 billion, down from $10.7 billion-$10.8 billion, and revenue from $7.95 billion-$8 billion, down from $8.15 billion-$8.2 billion.
These are significant guidance cuts in a year when cybersecurity is supposed to see huge demand, which is why many analysts downgraded the stock in the days following the earnings report. It is no surprise then to see Palo Alto Networks stock down 25% in just the last few trading days.
Is the stock cheap?
After its drop, Palo Alto Networks now trades at a market cap of $90 billion. The company generates close to $3 billion in free cash flow, but due to a lot of stock-based compensation and deferred revenue, its operating income was only $600 million over the past 12 months. Cash flow of $3 billion brings the stock multiple to around 30 times, which is still well above the market average.
Even at this discounted price, Palo Alto Networks stock remains expensive. That means investors need to have confidence in continued growth from the company for the stock to do well. That might be the case with the growing spending on cybersecurity from all sorts of entities around the world, making the stock a potential “buy the dip” candidate after this latest earnings report.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
