Palo Alto Networks' Earnings Could Provide Early Insight Into Crowdstrike's Fallout

The recent troubles surrounding CrowdStrike Holdings Inc. are raising questions about broader implications for the cybersecurity sector, with the spotlight now shifting to an upcoming earnings report that could offer some insights. While investors will have to wait until the end of the month to hear from CrowdStrike, a significant update from one of its main competitors, Palo Alto Networks Inc., is set to arrive on Monday, and it could provide valuable clues about the fallout from CrowdStrike's recent issues.

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CrowdStrike made headlines when a software update caused a global tech outage toward the end of the July quarter. This event has led to speculation about whether Palo Alto Networks experienced any short-term impact on its customer base as a result. Analysts are also curious to see if CrowdStrike’s brand reputation has taken a hit, potentially benefiting Palo Alto Networks by attracting new customers who might be reconsidering their cybersecurity vendor choices.

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Guggenheim analyst John DiFucci has expressed expectations for “modest upside” in Palo Alto Networks' quarterly revenue and billings, although he noted that one channel expert reported softer sales at the end of the quarter, likely influenced by the CrowdStrike incident. This suggests that while Palo Alto Networks might show overall positive results, the CrowdStrike saga could have created a ripple effect, causing some disruptions in the cybersecurity market.

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Similarly, Rob Owens of Piper Sandler mentioned that the CrowdStrike situation turned into an “all hands on deck” moment for IT and security teams. This likely caused some deals to be postponed across the board, impacting not just CrowdStrike but potentially other cybersecurity companies as well. The uncertainty created by CrowdStrike’s outage may have led to delays in closing deals, affecting the quarterly performance of various players in the industry.

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Beyond the immediate impact of CrowdStrike's troubles, analysts are keeping a close eye on Palo Alto Networks’ ongoing “platformization” strategy. This approach involves pushing for broader adoption of the company’s suite of products, sometimes by offering certain products for free temporarily. The goal is to encourage long-term growth by getting customers to integrate more deeply with Palo Alto’s ecosystem. However, this strategy has also sparked some concerns among investors, particularly regarding its impact on the company’s billing figures.

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Fatima Boolani from Citi noted that Palo Alto Networks’ commitment to this strategy might continue to put pressure on billings. She indicated uncertainty about whether the company will provide formal guidance on this front moving forward. If guidance is provided, it could potentially fall short of Wall Street's expectations of around 12% growth, reflecting the challenges of balancing short-term financial metrics with long-term strategic goals.

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Another issue that has captured investor attention is whether customers might become more hesitant to consolidate their cybersecurity needs with a single vendor following the CrowdStrike incident. The outage highlighted the risks associated with relying too heavily on one provider, which could lead some companies to consider diversifying their cybersecurity spend across multiple vendors to mitigate such risks.

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In other corners of the software sector, the upcoming week will see earnings reports from companies like Zoom Video Communications Inc., Snowflake Inc., and Workday Inc., providing additional insights into the broader tech landscape. These reports are scheduled for Wednesday and Thursday, respectively, and will be closely watched by investors.

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Looking at the broader earnings calendar, 14 members of the S&P 500 are set to report their results in the coming week, although the overall pace of earnings reports is starting to slow down. Notably, there are no companies from the Dow Jones Industrial Average scheduled to report.

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Investors will also gain further insight into the state of consumer spending, with Lowe’s Cos. Inc. slated to follow up on last week’s report from Home Depot Inc. Home Depot’s management expressed optimism that spending trends could improve if interest rates decrease, despite some pressure on home-improvement spending.

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In the retail sector, Walmart Inc.’s recent earnings report showcased the resilience of consumer spending, but the focus will now shift to Target Corp., which is set to report its earnings. Unlike Walmart, which has significant exposure to grocery spending, Target relies more on discretionary spending. It remains to be seen if Target’s results will receive the same positive reception as Walmart’s, especially given the different dynamics at play in their respective business models.

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Other retailers, such as TJX Cos. Inc. and Ross Stores Inc., are also scheduled to release their earnings, adding further context to the overall retail environment.

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One of the key events to watch next week is Peloton Interactive Inc.’s earnings report. The company, known for its connected exercise equipment, has struggled since its pandemic-driven peak. Peloton’s stock is down 98% from its January 2021 high, and analysts expect another decline in revenue for the June quarter. Investors will be eager to hear updates on the company’s cost-cutting measures and the ongoing search for a new CEO, which could be crucial for Peloton’s efforts to regain its footing.

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Finally, Target’s same-store sales will be a critical number to watch. Analysts expect Target to return to growth in this metric, with predictions of a 1.2% increase compared to the previous year. While this would break a streak of four consecutive declines, the growth might still fall short of what was seen at Walmart, which reported a 3.3% increase in same-store sales. UBS analyst Michael Lasser noted that discretionary retailers face more uncertainties now than they did 90 days ago. However, he remains hopeful that Target can achieve simultaneous growth in comparable sales and its EBITDA margin, a feat that many discretionary retailers might struggle to accomplish in the current environment.

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