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Why is Palo Alto Networks (PANW) Stock Losing Momentum?

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Shares of Palo Alto Networks Inc. PANW have been losing momentum of late. One of the major reasons behind this could be the company’s wider-than-expected loss during the third quarter of fiscal 2016, along with a discouraging earnings guidance for the fourth quarter.

Notably, the stock has tanked approximately 10% since the announcement of its third-quarter results on May 25. Also, year to date, the stock has lost over 25%.

Although Palo Alto Networks’ revenues came ahead of the Zacks Consensus Estimate and recorded a year-over-year improvement, its bottom-line results were quite dismal.

The company’s adjusted loss (excluding amortization and other one-time items but including stock-based compensation) for the quarter was wider than both the Zacks Consensus Estimate and the year-ago quarter loss. Loss widened mainly due to higher operating expenses, which more than offset the benefits of robust top-line growth.

Weighed down by the dismal bottom-line performance as well as enterprise spending concerns, the company gave a weak guidance for the fourth quarter.

Adding to its woes, Palo Alto Network faces stiff competition from several big and small players in the security application market. Over the past few years, demand for IT security has been growing on the back of increasing awareness, along with rising incidents of cyber-attacks, making the market more attractive for new players.

Also, there are some established players in adjacent markets like Cisco Systems, Inc. (CSCO - Free Report) , Check Point Software Technologies Ltd. CHKP and Juniper Networks, Inc. JNPR that can cross-sell security products and include security into their existing product lines, further intensifying competition in the space.

Also, the recent forecast on worldwide IT spending by Gartner has raised concerns about Palo Alto’s near-term performance. The research firm predicted worldwide IT spending to increase just 0.6% year over year in 2016 to $3.54 trillion.

Gartner cited the stronger dollar as the main reason behind the weak outlook. Notably, since the research firm started tracking expenses, 2015 witnessed the largest U.S. dollar drop in IT spending with worldwide IT spending declining approximately 5.8% year over year, or by $216 billion, to $3.52 trillion.

Gartner also believes that worldwide IT spending will not be able to surpass the 2014 level of around $3.74 billion until 2019. Although the research firm has not commented on IT security spending, persistent softness in overall IT spending may hurt this industry too.

Nonetheless, we are positive on the company’s top-line performance. Revenue growth appears steady, aided by strength across all its geographical regions and business segments. Also, customer wins, along with expansion of the existing customer base, has positively impacted revenues. We believe that the company’s product refreshes will further boost revenues, going forward.

Currently, Palo Alto Networks carries a Zacks Rank #3 (Hold).

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