Palo Alto Networks Inc (NASDAQ: PANW) came in ahead of Street estimates in its fiscal Q1 and issued slightly better-than-expected guidance for the full year as well on Thursday.
Still, the cybersecurity stock opened in the red this morning as two underlying weaknesses in the company’s earnings release eclipsed its strong headline number.
Versus its October high, Palo Alto Networks’ stock is now down more than 10%.
Profitability concerns are hurting Palo Alto Networks’ stock
PANW posted impressive growth in revenue for its fiscal Q1, but its bottom-line performance told a different story altogether.
The Nasdaq-listed firm saw its net income slip 5% year-on-year to $334 million in the first quarter, signaling rising costs or margin pressure.
For a company in the midst of aggressive expansion, shrinking net income can signal inefficiencies or dilution of earnings power. Investors often reward growth stories when profitability scales in tandem.
In Palo Alto Networks’ case, the earnings contraction may have triggered skepticism about whether its acquisition-heavy strategy is sustainable.
A post-earnings decline in PANW shares reflects this broader shift toward rewarding operational discipline over pure growth.
PANW shares are slipping due to rising capital expenditures
In Q1, Palo Alto Networks’ capital expenditures (CAPEX) climbed to $84 million – well over $58 million that analysts had forecast.
That’s a 44% overshoot – at a time when investors are increasingly wary of aggressive spending. Across tech, elevated capex has become a major red flag – especially when paired with declining net income.
PANW’s spending spree includes its $3.35 billion bid for Chronosphere and a pending $25 billion acquisition of CyberArk.
While these moves may strengthen its artificial intelligence (AI) and identity security capabilities, the near-term optics sure are challenging.
Investors are asking: Is the company overextending itself? The capex concerns are adding fuel to the fire – making investors bail on Palo Alto Networks shares today – even as management touts long-term strategic value.
Should you buy the dip? Cramer thinks so
Despite the post-earnings sell-off, some market veterans remain constructive on PANW stock. Jim Cramer, speaking to CNBC’s Investing Club, reaffirmed his confidence in Palo Alto’s long-term trajectory.
Given the endless hacks lately from the Chinese using really sophisticated equipment, I think there’s plenty of business for these guys.
The former hedge fund manager expressed confidence in Nikesh Aurora’s leadership and praised the company’s CyberArk acquisition, calling it “just sensational.”
He noted that Palo Alto Networks’ stock hasn’t fallen much from its highs compared to other tech names – emphasizing the enduring demand for cybersecurity solutions.
For long-term investors, this dip may be more opportunity than warning, Cramer concluded. Wall Street also currently has an “overweight” rating on the cybersecurity stock with an average target of about $226, indicating potential upside of 15% from here.
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