Why Palo Alto Networks Stock Dropped, Then Popped
Key Points
China may be investigating Palo Alto Networks over security concerns.
Palo Alto stock dropped on the news at first, but is already bouncing back.
Palo Alto earnings are due out Sept. 1.
Investors in Palo Alto Networks (NASDAQ: PANW) stock got a bit of a scare last week.
As TheFly.com reports, China's Cyberspace Administration agency accused Palo Alto of harboring links to "intelligence services," and launched a "review" of the cybersecurity company's products to protect China's "critical infrastructure."
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Palo Alto stock fell 1% on the news, but is bouncing back already Monday, recovering all losses and adding gains on top -- up 4.7% through 11:40 a.m. ET.
Image source: Getty Images.
Wall Street isn't scared of China
Helping to dispel investor concerns is a report from investment bank TD Cowen, which last week argued China's "review" is really just a "procedural formalization of existing restrictions" -- not new news at all, but just added detail on rules already in place. As such, the banker doesn't see it as cause for worry.
Moreover, as TD points out, even if China is specifically targeting Palo Alto for attack, the Chinese market is "immaterial" to Palo Alto, representing less than 1% of the company's annual revenue. Viewed in that context, last week's 1% decline was perhaps justifiable... but really only in a worst-case scenario.
What's next for Palo Alto stock
Meanwhile, back at the ranch, U.S. investors are still waiting to see Palo Alto's Q3 shaped up. Earnings are due out Sept. 1, and analysts, on average, anticipate Palo Alto will report 32% sales growth to $3.35 billion for the quarter -- but only 3% earnings growth to $0.98 per share.
If you're looking for something to worry about, that's what I would focus on -- and forget about China. At last report, Palo Alto stock costs more than 350 times trailing earnings. If all the company can muster is 3% earnings growth, it's going to be really hard to justify that high stock price.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.