Understanding the market | Why did the "AI giant stock" Palo Alto plummet more than 20% after hours?

Zhitong App learned that Palo Alto Networks Inc (PANW.US), a US cybersecurity company, lowered its total revenue forecast for the current fiscal year (2024 fiscal year). In the after-hours trading of the US stock market, its stock price plummeted by nearly 21%, sparking concerns that the company's clients in the technology sector are controlling their expenses. The company, focusing on "AI + cybersecurity," stated in a declaration on Tuesday local time that the total revenue for the 2024 fiscal year is expected to be between $7.95 billion and $8 billion, a year-on-year increase of 15% to 16%. The company's previous upper limit for total revenue was as high as $8.2 billion, while analysts generally expected it to be $81.8 billion.

In terms of the latest performance, the cybersecurity company headquartered in Santa Clara, California, achieved a total revenue of $1.98 billion in the second quarter of the 2024 fiscal year ending on January 31, a 19% year-on-year increase, slightly exceeding analysts' expectations of $1.97 billion. The growth rate of product sales was evidently slower than that of service and support sales, highlighting the transformation the company is undergoing. Excluding certain items, the non-GAAP earnings per share were $1.46, higher than analysts' expectations.

As for the performance expectations for the 2024 fiscal year Q3, the adjusted earnings per share range for Q3 is $1.24 to $1.26, while analysts generally expected it to be around $1.29. The total revenue range for Q3 is $19.5 billion to $19.8 billion, with analysts generally expecting it to be around $20.4 billion.

Furthermore, Palo Alto Networks also expects that the total contract value for the 2024 fiscal year, a closely watched operational indicator, will be approximately $10.2 billion (the latest expected range is $10.1 billion to $10.2 billion); however, the company's previous upper limit expectation for total contract value was $10.8 billion.

The performance outlook of Palo Alto Networks indicates that even with the recent surge in cyberattacks, customers may lower their technology spending targets and retract their consumption ambitions. The company's highest growth expectation for total revenue in the latest fiscal year is 16%, significantly lower than the year-on-year growth rate of over 25% in recent years.

Moreover, the company indeed maintained its full-year earnings per share and free cash flow expectations for the 2024 fiscal year as expected by the market. Dipak Golechha, the company's Chief Financial Officer, stated that this reflects the company's "strict adherence to profit growth trends." The company also stated that its goal is to achieve an annual revenue of approximately $15 billion from its so-called "next-generation security" by the 2030 fiscal year. Palo Alto Networks CEO Nikesh Arora stated during the earnings conference call that the company has been successfully executing its profit growth strategy. However, he also mentioned that some customers are facing "spending fatigue" in terms of cybersecurity.

"This is one of the new phenomena we have discovered," he said. "Some customers seem to imply that adding incremental products may not necessarily result in better security outcomes for them."

Nevertheless, CEO Arora also emphasized that as cyber attacks intensify, it is undeniable that some customers have increasingly high demands for cybersecurity companies. He highlighted during the earnings call, "We are increasingly focused on collaborating with companies that have been affected by malicious activities." However, he also noted that federal customer spending appears somewhat weak, partly due to a government project the company had planned earlier that did not materialize.

After Palo Alto, one of the "AI tech giants," announced its latest earnings expectations, its stock price plummeted in after-hours trading. Following the release of the latest financial data, the stock fell by 15% at one point in after-hours trading. Palo Alto Networks' downward revision of its total revenue forecast for the 2024 fiscal year even caused other cybersecurity companies' stock prices, such as Crowdstrike Holdings Inc. (CRWD.US) and Zscaler Inc. (ZS.US), to face intense selling pressure in after-hours trading, with declines of over 8%.

According to statistics, after soaring over 110% in 2023, Palo Alto Networks, one of the "AI tech giants" in the US stock market, has seen a year-to-date increase of 24% in its stock price this year. Investors are hopeful that global corporate investments in cybersecurity will continue to soar and expect Palo Alto, which is integrating AI technology into the cybersecurity field, to benefit from the ongoing global AI investment frenzy. Currently, Palo Alto, dedicated to integrating AI technology into the cybersecurity field, is undoubtedly one of the biggest winners in the global stock market surrounding the AI investment frenzy.

Palo Alto Networks' stock performance in 2024 has outperformed most popular tech stocks, such as Microsoft, Google, Amazon, AMD, and cybersecurity peers like Crowdstrike.

CEO Arora of Palo Alto Networks mentioned during the earnings conference that he sees the revenue growth potential brought by artificial intelligence technology. He emphasized that some customers are seeking the company's assistance to achieve "successful and responsible deployment of AI technology in their infrastructure for security protection." Alora also mentioned that as artificial intelligence becomes a key focus technology for global enterprises, some customers are urgently seeking to protect the security of their AI-related deployments and development work.

Palo Alto Networks has applied advanced technologies such as Artificial Intelligence (AI) and Machine Learning (ML) in the field of cybersecurity to enhance the effectiveness of its security solutions. For example, integrating AI technology can help Palo Alto analyze a large amount of threat intelligence data to discover patterns and correlations, which helps identify new threats and attack methods. It also enables Palo Alto's security systems to automatically respond and counter threats rapidly, such as automatically blocking malicious IP addresses and isolating infected endpoints.

Palo Alto Networks has launched an AI-driven platform called Cortex® XSIAM, which aims to fundamentally change the way security organizations deploy data, analyze, and automate network security services. In addition, Palo Alto Networks plans to release a large-scale language model for network security within a year, integrating generative AI into its products and enterprise workflows. The CEO revealed that by integrating various forms of AI technology, including generative AI, network threat detection and prevention capabilities can be significantly enhanced. Palo Alto aims to deploy the latest artificial intelligence technology in every product.