Why Fortinet, SentinelOne, CrowdStrike and other cybersecurity stocks plummeted Wednesday morning

By | February 22, 2024

A number of cybersecurity companies fell out of the gate on Wednesday morning and never looked back. As of 1:35 PM ET, shares of Zscaler (NASDAQ: ZS) down by 13.9%, SentinelOne (NYSE:S) decreased by 10.8%, CrowdStrike Holdings (NASDAQ: CRWD) down by 9.4%, Fortinet (NASDAQ: FTNT) fell by 4.2%, and Cloudflare (NYSE:NET) lost 4.2%.

A check of all the usual sources – regulatory filings, analyst commentary and financial reports – found no company-specific news fueling these declines, suggesting the share price moves were driven by the gloomy outlook and strategy shift by a rival in the space. .

A person in business attire pressing a holographic cybersecurity lock icon.A person in business attire pressing a holographic cybersecurity lock icon.

Image source: Getty Images.

Solid results with a dose of uncertainty

After closing Tuesday Palo Alto Networks (NASDAQ: PANW) reported results for the second quarter of fiscal 2024, and investors were surprised. For the period ended January 31, revenue grew 19% year over year to $2 billion, driven by expanding relationships with existing customers. This resulted in adjusted earnings per share (EPS) of $1.46, an increase of 39%.

These results exceeded consensus estimates from analysts, who had expected revenue of $1.97 billion and adjusted earnings per share of $1.30.

However, it was a dramatic shift in the company’s strategy that surprised investors and led management to lower full-year expectations for Palo Alto.

Palo Alto Networks offers three platforms including network security, cloud security and security operations. CEO Nikesh Arora announced that Palo Alto wants to accelerate its multiplatform strategy. He noted that the lifetime customer value of a customer who adopted two of his three platforms was five times greater than the value of a customer with one platform. For those who adopt three platforms, the number is more than 40 times greater. So it’s understandable that the company wants to accelerate multi-platform adoption.

In support of this change in strategy, management noted that starting Thursday it will “launch a significant number of platform offers to our customers” in the form of incentives, free trials and discounts. As this program continues to evolve over the next twelve to eighteen months, Arora expects Palo Alto to take a hit in revenue growth.

Therefore, management has lowered its guidelines. For the company’s third fiscal quarter, management expects revenue between $1.95 billion and $1.98 billion, which would represent year-over-year growth of 14% at the midpoint. Perhaps most telling is the outlook for billings growth of just 3% to $2.33 billion, illustrating the consequences of the company’s decision – at least in the short term.

Arora also noted that the company was starting to see “cybersecurity spending fatigue.” Investors took that as a bad sign for the entire sector, and many stocks in the sector were sold off at once.

Turning a company-specific molehill into a mountain

What does this all mean for Palo Alto’s rivals?

In a word: nothing.

Guggenheim analyst John DiFucci questioned the company’s need to offer incentives “when other companies are following a similar consolidation path without having to give away product for a while.”

Jefferies analyst Joseph Gallo addressed the spend fatigue, writing, “While it makes sense that cyber fatigue is common among Palo Alto’s megadeals, we haven’t heard this anywhere else,” suggesting this was a company-specific problem.

It seems exaggerated to suggest that competitors will suffer from Palo Alto’s change in strategy.

On Tuesday, Zscaler scored two price target increases from analysts. The first arrived courtesy of Truist, which maintained a buy rating on the stock and raised its price target to $260, which would represent an upside of about 20% after Wednesday’s plunge. The analyst noted that following industry discussions, demand appears to have stabilized “despite the challenging macro environment.” UBS was even more bullish, maintaining its Buy rating and raising its price target to $300, or about 40% upside potential. That analyst suggested the environment was more positive than the company’s conservative guidance suggests.

In the wake of Palo Alto’s results, Guggenheim analyst John DiFucci maintained a buy rating on SentinelOne stock while raising his price target to $32, suggesting potential upside of about 23%. The analyst said he expects another “top-line beat and raise” when the company reports early next month.

Guggenheim was also bullish on CrowdStrike, with a buy rating and price target of $358, which would result in a potential upside for investors of 23% from current levels. DiFucci believes CrowdStrike will “grow faster and achieve greater scale” in the coming years, which will benefit shareholders.

This all goes a long way to suggesting that the fate of an industry does not rest on one company.

To be clear, none of these stocks are cheap by traditional valuation measures. Cloudflare, CrowdStrike, and Zscaler currently trade at price-to-sales ratios of 15, 14, and 14, respectively, while Fortinet and SentinelOne each have a price-to-sales ratio of 7.

Of these five stocks, CrowdStrike is the best choice for my money. The company continues to generate robust growth and has achieved the scale necessary to thrive.

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Danny Vena has positions in Cloudflare, CrowdStrike and Zscaler. The Motley Fool holds positions in and recommends Cloudflare, CrowdStrike, Fortinet, Palo Alto Networks, and Zscaler. The Motley Fool has a disclosure policy.

Why Fortinet, SentinelOne, CrowdStrike and other cybersecurity stocks plummeted Wednesday morning was originally published by The Motley Fool

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