Investing.com -- Shares of Palo Alto Networks (NASDAQ:PANW) fell more than 2% in premarket trading Wednesday after analysts at BTIG and Deutsche Bank (ETR:DBKGn) downgraded the stock.
BTIG cut its Palo Alto rating from Buy to Neutral, citing concerns over the company's growth prospects in its core network security market and its Next-Generation Security (NGS) business.
Specifically, the firm expressed skepticism about the company's ability to sustain a growth rate above 15%, coupled with limited upside to Street estimates for NGS Annual Recurring Revenue (ARR) this year.
“We think the segment could decelerate at a faster-than-expected pace in FY26 and FY27 as PANW laps the benefit of traditional attached firewall subscriptions migrating to advanced SKU's categorized as NGS ARR,” BTIG analysts led by Gray Powell said in a note.
“With limited upside catalysts this year and risk to estimates longer term, we see a balanced risk-reward on the shares at current levels,” they added.
Deutsche Bank also shifted its position on Palo Alto Networks, downgrading the stock to Hold. The bank’s analysis suggests that 2025 could present challenges for cyber consolidators, as customer preferences may lean towards best-of-breed rather than best-of-suite solutions within the sector.
“Though not a call on the long-term quality of the business, we expect 2025 to represent a tougher operating environment for PANW as one of the leading cyber platforms against lofty investor expectations that seemingly embed persistent consolidation tailwinds,” Deustche’s team noted.
Deutsche Bank also pointed out that while Palo Alto's FCF showed resilience in FY24, aligning with initial guidance despite a shift to platformization, they do not foresee significant upside to FY25 FCF as seen in previous years.
The firm stressed the importance of the quality of FCF, adding that recent benefits from working capital effects might not be sustainable long-term.
On the other hand, the bank pointed out that CEO Nikesh Arora's track record of execution and delivery for stakeholders could pose an upside risk to their thesis. It also acknowledged that FCF can be managed from period to period and is sensitive to working capital changes, which adds complexity to forecasting.