Cisco Systems' (CSCO) push into the security market could be one reason for woes at Palo Alto Networks (PANW), whose stock plunged Wednesday after the company late Tuesday reported fiscal second-quarter revenue, billings and guidance all below street expectations.
Palo Alto Networks stock tumbled more than 24% to 115.21 on the stock market today, hitting an eight-month low and echoing a severe drop on Nov. 22 that came after fiscal Q1 revenue and billings missed expectations. While Palo Alto management attributed the Q2 miss to sales execution issues and a pause in spending ahead of the new product launch, analysts say increased competition from Cisco could also be a factor.
For its second quarter ended Jan. 28, Cisco said security revenue rose 14% to $528 million. Palo Alto late Tuesday said fiscal second-quarter revenue rose 26% to $422.6 million, missing consensus estimates of $429.6 million.
"Management cited execution issues as opposed to competitive challenges," Baird analyst Jayson Noland said in a report to clients. "However, Cisco has improved its security portfolio meaningfully (and) we have heard of competition getting more intense with Cisco."
Baird, JPMorgan, William Blair and Wunderlich on Wednesday downgraded Palo Alto stock, while Piper Jaffray, RBC Capital, BMO Capital Markets and Citigroup lowered their price targets on the company.
IBD'S TAKE: Cisco stock has climbed about 13% in 2017 and appears slightly extended from a 31.99 buy point. Learn more about Cisco's chart and growth trends at IBD Stock Checkup.
Palo Alto competes in the corporate security firewall market vs. Cisco, Check Point Software Technologies (CHKP) and Fortinet (FTNT). Firewalls block unauthorized traffic from entering a private network.
"We believe that Check Point may be the best stock of the leading network security providers, given that we don't think it will face decelerating revenue pressures," said Keith Bachman, a BMO Capital analyst, in a report. "We believe that PANW's growth is slowing given the force of gravity from a maturing network security market, increased competition, especially from Cisco's increased focus on its security business, and some cloud impact."
Walter Pritchard, analyst at Citigroup, said in a report: "We expect sales execution in Q2 combined with a gradually more difficult competitive backdrop is at play here as Cisco is better defending its base and Juniper Network's (JNPR) installed base has contracted to the point Palo Alto can't take enough share to drive growth rates."
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