Palo Alto Networks (PANW) - Get Palo Alto Networks, Inc. Report has "underperformed significantly," a Raymond James analyst said Tuesday as he upgraded the cybersecurity platform to outperform from market perform with a $400 price target, two days before the company is scheduled to report quarterly earnings.
Analyst Adam Tindle said in a research note that Palo Alto Networks "has underperformed significantly year to date, and we previously noted our concern that next gen [annual recurring revenue] guidance did not appear conservative."
"We do still see this as a risk, but the stock has been penalized as relative valuation has compressed," Tindle said.
"[And] our focus has now been turned to increased confidence that PANW can enter into a period of healthy growth and incremental profitability that are hallmarks of outperforming stocks in this space."
Tindle said the company "endured a sustained period of healthy growth and operating leverage for the better part of prior CEO Mark McLaughlin's tenure," which ended in 2018.
"However, significant investments, primarily in the form of meaningful acquisitions under current CEO Nikesh Arora, have resulted in a period of depressed operating margin while peer Fortinet (FTNT) - Get Fortinet, Inc. (FTNT) Report has balanced organic growth with improving profitability and significantly outperformed during this period."
Looking ahead, the analyst continued, "this creates an opportunity for Palo Alto as the previously noted Prisma platform is hitting an inflection, new [Chief Financial Officer] Dipak Golechha can be a catalyst for change in showing more operational improvement alongside this, and a revamped [investor-relations] effort should aid in communicating this story."
Palo Alto Networks is scheduled to report quarterly earnings on Thursday after the closing bell. Analysts surveyed by FactSet are expecting the company to report earnings of $1.29 a share on revenue $1.06 billion.
In February, Palo Alto Networks beat Wall Street's second-quarter earnings expectations and raised its guidance. The company also posted stronger-than-expected fiscal-first-quarter revenue in November.
Shares of the Santa Clara, Calif., company at last check were 2.3% higher at $343.37. Fortinet, Sunnyvale, Calif., was trading up 1.5% at $207.33.