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Palo Alto Networks Down to Strong Sell: Should You Avoid It?

On Apr 7, 2016, Zacks Investment Research downgraded Palo Alto Networks Inc. PANW to a Zacks Rank #5 (Strong Sell). Going by the Zacks model, companies holding a Zacks Rank #5 are likely to underperform the broader market.

Why the Downgrade?

The company reported second-quarter fiscal 2016 adjusted loss per share (excluding amortization and other one-time items but including stock-based compensation), on a proportionate tax basis, of 83 cents. The figure was significantly greater than the Zacks Consensus Estimate of a loss of 20 cents. The company had suffered a loss of 42 cents in the year-ago quarter.

Adding to the woes, the company faces stiff competition from several big and small players in the security application market. Further, over the past few years, the demand for IT security has been on the rise driven by increasing awareness and cyber-attacks, making the market more attractive for new players.

Also, there are some established players in the adjacent markets like Cisco Systems, Inc. CSCO, Check Point Software Technologies Ltd. CHKP and Juniper Networks, Inc. JNPR  that can cross sell security products and include security into their existing product lines, further intensifying competition in the space.

Moreover, a dismal overall trend resulted in downward estimate revisions for Palo Alto. Over the last 60 days, four out of five estimates were revised downward for fiscal 2016. The Zacks Consensus Estimate for loss also moved down by 43 cents to a loss of $1.04 per share over the same time frame.

It is worth mentioning that the recent forecast for worldwide IT spending by Gartner raises concerns about Palo Alto’s near-term performance. The research firm expects worldwide IT spending to increase just 0.6% year over year in 2016 to $3.54 trillion. Gartner cited the stronger dollar as the reason behind the weak outlook. Notably, 2015 witnessed the largest U.S. dollar drop in IT spending, since the research firm started tracking the expenses. Last year, worldwide IT spending declined approximately 5.8% year over year or $216 billion to $3.52 trillion. Gartner also predicts that 2014 worldwide IT spending levels of about $3.74 billion won’t be surpassed until 2019. Although the research firm has not commented on IT security spending, but a persistent softness in overall IT spending may negatively impact this industry too.

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CISCO SYSTEMS (CSCO): Free Stock Analysis Report
 
JUNIPER NETWRKS (JNPR): Free Stock Analysis Report
 
CHECK PT SOFTW (CHKP): Free Stock Analysis Report
 
PALO ALTO NETWK (PANW): Free Stock Analysis Report
 
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