Palo Alto Networks (PANW) "crushed" expectations on Tuesday. Ironically, they set these exact expectations a few months earlier. The company has become the security king of underpromising and over-delivering. Thus far the move has been good enough for a 6% push higher in price recently and more than a dozen analysts raising their price target and/or upgrading shares.
The company reported earnings per share of $1.51 on revenue of $711.2 million. Analysts had predicted revenue of $682.1 million resulting in earnings of $1.22. While it may seem like analysts really had this one wrong, recall that in November 2018, Palo Alto set expectations of revenue in the range of $675-685 million resulting in earnings of $1.20-$1.22 per share.
Let's take it back another quarter when Palo Alto reported $1.17 EPS on $656 million revenue. Both of these numbers breezed past Wall Street estimates of $1.05 on $631.89 in revenue. Those estimates were the midpoints of management's guidance in early September when they said the company should earn $1.04-$1.06 on revenue in the range of $625-$635 million.
And, yes, this pattern is consistent if you trace it back further in time. At what point does the company's guidance mean nothing? Either management truly has no idea about the current state of business or they do this on purpose. My guess is it is the latter given how consistent the "beats" are versus the guidance. It does create a situation where an in-line report or only a slight beat will result in a selloff, while a miss will likely result in a 20%+ down day. It's a dangerous game to play and once you start, you can't stop, as we see with PANW.
There's no denying the strength in PANW's report. The company's growth metrics range from 27-33%, which is impressive for a $22 billion company. Add in the $1 billion buyback that could remove 4.5% of the company's shares from the market and we have our reason for today's move, but I'm not sure it will hold. The stock tends to reverse more often than it continues post-earnings. Fortunately for bulls, this data isn't statistically significant, so I wouldn't jump in with a bearish trade; however, I would take advantage of the pop to bump up stops or grab some partial downside hedges. Implementing a collar or setting up a covered call or ratio covered call position are approaches I would consider.
The technical picture should see a price breakout on the weekly chart as long as PANW closes above $230 this week. I imagine that will hold. If this rounding pattern is truly to mean something, then we'd want to see some consolidation (sideways action) for the next few weeks. That would create a cup and handle pattern that would target around $300-$330 on the upside once the stock closes above $260. While overbought can become more overbought, multiple secondary indicators are stretched to their max and history doesn't scream "buy". I'm sitting this one out and watching for the consolidation handle to form before making a move.