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Why Palo Alto Networks' Stock Lost 20% in May

By Demitri Kalogeropoulos – Jun 7, 2019 at 9:34AM

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Investors weren't happy with a few of the metrics it reported in its third-quarter earnings announcement.

What happened

Palo Alto Networks (PANW -0.26%) shares underperformed a weak market last month as the stock lost 20% compared to a 7% decline in the S&P 500, according to data provided by S&P Global Market Intelligence.

The drop left shareholders with sluggish returns so far in 2019, with the stock up 5% compared to a 13% boost for the broader market.

A man interacts with a security screen.

Image source: Getty Images.

So what

The cybersecurity specialist announced generally healthy fiscal third-quarter sales results in late May as its 28% revenue boost outpaced management's guidance. A few engagement metrics worsened in the period, though, including billings and average contract length. Investors also punished the stock after executives predicted rising costs tied to their aggressive acquisition strategy.

Now what

There's little reason to worry about Palo Alto's growth today since its customer base is expanding and existing customers are increasingly opting for a wider range of services. The software company's acquisition strategy adds more risk for investors, though, since it will typically take a few quarters before it becomes clear that new purchases are creating shareholder value. Management's recent track record is positive on this score, and a bullish thesis on this stock rests on that trend continuing.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Palo Alto Networks. The Motley Fool has a disclosure policy.

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