(Bloomberg) -- Palo Alto Networks Inc. shares have been on a tear over the last two weeks, boosted by strong results from a pair of cybersecurity peers and a broader-based rebound by equity markets.
But, to keep that rally going, the company will need to show investors that it expects steady demand and that it’s managed to scoop up new customers in the wake of CrowdStrike Holdings Inc.’s July outage.
The stock is up 16% since Aug. 5, buoyed partly by rosy updates from Fortinet Inc. and Check Point Software Technologies Ltd. It remains well short of January’s all-time high, after Palo Alto cut its annual revenue forecast in February and sparked fears that users are cutting back. The market’s also still forming a view on the company’s shift to “platformization,” a strategy focused on bundling services. The firm is expected to report earnings on Monday after the close of trading.
“We think that for the long run it’s a smart strategy,” said Jamie Meyers, a senior equities analyst at Laffer Tengler Investments. In the short term, however, “the problem is that Wall Street doesn’t necessarily appreciate it,” he said. Meyer’s priorities in the earnings include how many large deals Palo Alto can show along with progress in platformized customer numbers and the outlook on this front. “We’re still in early innings here, so we’re really watching it.”
Shares of Palo Alto rose as much as 3.1% in intraday trading Monday.
Also key is commentary from Palo Alto executives on the aftermath of CrowdStrike’s flawed software update, which set off a global IT meltdown. Investors are keen to know whether Palo Alto won business during customer churn sparked by the world’s biggest tech outage.
“Palo Alto is one of the biggest in the industry, and so I think that all eyes and ears will be on what they say,” said Irene Tunkel, chief US equity strategist at BCA Research Inc.
Revenue in the company’s fourth quarter is expected to be about $2.2 billion, an 11% jump from the same period last year. Still, that would mark the fourth consecutive quarter of slowing growth. Billings are expected to be about $3.5 billion, up about 10% on the year.
Analysts are divided on what to expect from Palo Alto’s forecasts. The Santa Clara, California-based company has already dialed back expectations somewhat, particularly with February’s cut to revenue guidance, which triggered a record drop in the stock.
“Palo Alto is unique because it had pretty bad results before — so it’s important for them to impress investors,” said Tunkel. Attention on the outlook is heightened because “it’s not clear to what degree they have a competitive moat,” especially against megacap technology companies that may bring cybersecurity in-house, she said.
Wall Street remains bullish overall on the stock, which has 40 buys, 15 holds, and zero sell ratings among analysts tracked by Bloomberg. Still, the potential for share-price gains in the near term may be limited due to headwinds highlighted by management on the outlook for billings, revenue and free cash flow.
“Deceleration of those metrics could limit earnings-driven upside at current valuation levels as investors evaluate potential for sustainable FCF growth,” JPMorgan analysts led by Brian Essex wrote in an Aug. 15 note.
Because of Palo Alto’s shift in strategy, the fourth quarter could serve as a “clearing event to reset numbers, potentially offering a better buying opportunity post-EPS,” Evercore ISI analysts led by Peter Levine wrote the same day.
Of course, if the company comes up with solid future projections and demonstrates that it has been able to benefit from the CrowdStrike fallout, there could be a boost to investor sentiment.
“We are curious if Palo’s initial guide will be enough to send shares higher post the print,” Stifel analysts led by Adam Borg wrote in an Aug. 11 note. Borg said he remains bullish on the stock, despite some less-favorable near-term dynamics.
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Earnings Due Monday
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--With assistance from Subrat Patnaik and Rheaa Rao.
(Updates stock moves midday.)
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