Palo Alto Network’s Odd Summer Friday Report Has Wall Street Asking Why

2023-08-19 01:51

Palo Alto Networks Inc. investors are cautious ahead of the cybersecurity firm’s fiscal fourth-quarter results, which will be

Palo Alto Network’s Odd Summer Friday Report Has Wall Street Asking Why

Palo Alto Networks Inc. investors are cautious ahead of the cybersecurity firm’s fiscal fourth-quarter results, which will be released at the highly unusual time of Friday after the market close.

Such scheduling is almost unheard of among US companies, as it prevents investors from trading on the news over the weekend. While spokesperson Nicole Hockin said the date “really came down to schedule and logistics challenges,” some investors took it as a red flag.

The stock has dropped 17% since the timing was announced, with a guidance cut from peer Fortinet Inc. adding to the pressure. The stock rose 0.5% on Friday, reversing an earlier decline.

Shares remain up 50% this year, and the stock is among the 15 biggest gainers in the Nasdaq 100 Index.

“Doing it Friday after the close lifts an eyebrow,” said Michael Matousek, head trader at U.S. Global Investors. “If Palo Alto was expecting a positive reaction, you would expect it to put the news out when it can make a splash and everyone can trade on it. Most traders are already gone from their desks by Friday afternoon.”

According to Bespoke Investment Group, there have only been two examples of S&P 500 companies releasing results on Friday afternoons over the past 10 years: Nike Inc. in December 2020, and Anadarko Petroleum in July 2019, shortly before Occidental Petroleum Corp. completed its acquisition of the company. A notable outlier for timing is Warren Buffett’s Berkshire Hathaway Inc., which often reports on Saturdays.

While Nike rose in the session following its Friday results, Palo Alto’s report will have a lot for investors to grapple with, as it is set to include a strategy review and new medium-term financial targets. The report also comes ahead of the company’s national sales meeting next week.

Given all this, Palo Alto’s Hockin said in emailed comments, “We wanted to ensure that our sell-side analysts would have time to consume the data, as well as potentially follow-up with us.”

Stifel Nicolaus & Co. analyst Adam Borg said the timing suggests news that Palo Alto “wants investors to have the weekend to digest.” That could be an executive change or M&A-related news, he wrote in a note, although a mixed report or outlook “is the highest likelihood event.”

Analysts tracked by Bloomberg expect Palo Alto’s fourth-quarter report to show adjusted earnings growth of more than 60% and revenue growth of 26%. The consensus hasn’t budged over the past month — a period that includes the timing announcement and Fortinet’s report.

For the fiscal year that’s just ended, revenue growth is expected to decelerate to 25% from 29% last year before continuing to slow modestly in each of the following two years. That comes as the stock trades at 41 times estimated earnings. While that’s a sizable discount to Palo Alto’s 10-year average of 62 times, it represents a notable premium to the Nasdaq 100, as well as the cybersecurity index.

The stock remains well liked on Wall Street. Nearly 90% of analysts recommend buying Palo Alto, and the average price target suggests upside of 22%, according to data compiled by Bloomberg. However, Wedbush removed it from its best ideas list after Fortinet’s report, citing limited near-term upside amid concerns about growth in the sector.

Given that backdrop, the timing of the results can’t help but stand out.

“It’s not usually positive when management’s actions differ materially from the norm,” wrote John DiFucci, a senior managing director at Guggenheim. “Given the complexity of [Palo Alto’s] business model and sometimes opaque disclosure, it’s hard to be sure of anything.”

Tech Chart of the Day

Microsoft Corp. shares are down 13% from a July peak, with the software giant closing under its 100-day moving average on Thursday for the first time since January. Closing under this technical level is seen as a sign of weak medium—term momentum. Apple Inc. also closed below its 100-day this week.