Analysis: PANW

What's been going on with Palo Alto Networks (PANW) ?

We detailed our history with this stock in length and ran it through the prism of our investment rules during our February members-only conference call (that can be found here), but ever since the stock's post-earnings surge to roughly $260 in pre-market trading on Feb. 27, which is when our discipline correctly called for taking profits in our Alert here, the shares have been on a steady decline (outside today's bounce) and have now fallen back around its pre-earnings price. The stock is still up around 25% year to date and has rallied more than 40% off its November lows, but its momentum has stalled since that blowout quarter a week ago. So what's behind the recent moves in Palo Alto?

The selling pressure might be from investors who bought the November 2018 capitulation-like declines, as we did, and locked in gains due to the "Fear of Big Seller" trend we have seen in many software stocks. But those sellers might be far too short-term focused because news this week reinforced our view of how important the cybersecurity industry has become in today's society. This past Wednesday, The Wall Street Journal reported here that there have been more than 200 cyberattacks linked to Iranian hackers in the past two years. The need for cybersecurity has never been greater.

But there was an additional headline this week that might have made some investors uneasy and caused them to sell. In an article on found here, the author reported that two Palo Alto Network's sales leaders had left the company in recent weeks. Investors don't like to see turnover in sales leadership, especially when the company just gave you a quarter where they fired on nearly every cylinder. Therefore, the immediate reaction by many was to sell.

But PANW is holding up in today's down session, likely off a research note from Barclays that followed a meeting their analyst had with Palo Alto CFO Kathy Bonanno and CMO Rene Bonvanie. Among other positive takeaways, the analysts noted: "Talk of channel changes overblown - program is still the same but now partners can get economics from cloud deals, which is good." This helped shut down the notion of how the recent changes may have disrupted sales, because according to the note, the only change seems to be that partners will now be able to sell cloud products in addition to the current program, and ultimately make more money.

"PANW will now give traditional channel partners a referral fee for bringing this into deals," Barclays wrote, "allowing them to get economics they weren't able to get before."

"This also gets channel providers into more cloud transformation deals, which tend to carry more services," Barclays added, "and that is an opportunity for channel partners in general in our view."

Overall, Barclays said they left their meeting with management "feeling good about the normalized FCF margin of 36% this year - in fact, we think this was one of the most important numbers given on the last call." We'll continue to monitor for news of any type of channel disruptions and leadership changes, but it appears that the recent pressure has just been about "Fear of Big Sellers" and not much more.