Palo Alto Networks (NASDAQ: PANW) stock reached a 52-week high of $380.84. The company's stock price plummeted after its fiscal second quarter (ending Jan. 31) results were revealed on Feb. 20. Currently, shares are considerably below the 52-week high. Does this share price decline offer a buy? Is this a warning to avoid Palo Alto Networks?
That question requires a deeper look at the company. Palo Alto Networks stock dropped, thus understanding why can assist determine its long-term investment potential. Several causes caused Palo Alto Networks stock to decrease. U.S. government spending is soft. CFO Dipak Golechha said, "This U.S. federal weakness was a meaningful headwind to our billings in Q2."
However, enterprise cybersecurity spending scrutiny may be the biggest factor. As Nikesh Arora said, "The part that is new, despite the many demand drivers we're seeing, we're beginning to notice customers are facing spending fatigue in cybersecurity."
Palo Alto Networks management remarked that most clients spent more on cybersecurity than IT. This has clients wondering how to cut cyber threat protection costs. This development presents an opportunity for Palo Alto Networks, which made a strategy shift this year.
Palo Alto Networks will now encourage customers to consolidate their cybersecurity needs onto one platform and stop using numerous vendors. Customers can lower cybersecurity costs this way.
The business announced it will waive transition expenses for customers switching cybersecurity vendors to Palo Alto Networks. This aggressive customer acquisition strategy indicates the corporation expects short-term revenue losses. It's logical considering Palo Alto Networks is taking on clients for free.
This revenue reduction is expected to last 12–18 months. The company lowered its fiscal 2024 revenue expectation from $8.15 billion to $7.95 billion. Palo Alto Networks stock fell due to this expected revenue change.
New Palo Alto Networks strategy benefits Palo Alto Networks' management team believes the new strategy will succeed long-term despite the short-term revenue effect. He said, "We believe we can build customer confidence in our platforms by approaching them well before their point product contracts expire."
Palo Alto Networks management expects long-term ARR growth from this strategy. The company's annual client contract revenue is measured by ARR. Palo Alto Networks' ARR growth outlook. The business predicted $3.95 billion ARR for fiscal 2024. With its new plan, Palo Alto Networks hopes to reach $15 billion in ARR by 2030.
The firm appears capable of this significant revenue increase. Since Arora became CEO in 2018, revenue has skyrocketed. Palo Alto Networks' long-term revenue growth may be hampered in the short term. Despite its lower projection, the company expects 2024 fiscal year sales of $7.95 billion, up double-digits from $6.9 billion.
Additionally, Palo Alto Networks generates strong free cash flow (FCF). In the first half of fiscal 2024, Palo Alto Networks generated $2.1 billion in FCF, up from $1.9 billion. Another factor in evaluating Palo Alto Networks stock is Wall Street analyst opinion. They expect the company's stock will rise, with a consensus $335 target.
Given Palo Alto stock's constant revenue growth, robust FCF production, and aggressive customer acquisition strategy, it may be a good long-term investment.
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