Palo Alto’s Latest Earnings Report, and Countdown to Jackson Hole & Retail Earnings 8/18/23

0:00Thank you, Morgan. We're right now on fast. Rarer than a shooting star on a snowstorm in August. An earnings report after the bell on a Friday night, sending shares of Palo Alto Networks jumping after hours. We're digging in on those numbers and bringing you the details from the two-hour-long conference call. Plus, countdown to Jackson Hole. Fed officials convening on the Wyoming resort town next week as benchmark interest rates hover at 16-year highs. What will be on their mind as they lay the groundwork for the rest of the year? And later, we've only just scratched the surface of retail earnings this quarter.

0:34Macy's, Nordstrom, Kohl's, and many, many others are on the docket for next week. The reports you should be watching for and the real read on the consumer. I'm Courtney Reagan in this evening for Melissa Lee. This is Fast Money live from the NASDAQ market site. On the desk tonight, we have Steve Grasso, Bono and Eisen, Tim Seymour, and Julie Beal. But we start with that rare Friday night earnings alert on Palo Alto Networks. Shares are surging after the company reported better than expected earnings, even as revenues came in slightly below consensus. Revenue guidance also lighter than expected.

1:07That monster two-hour earnings call is underway. Bertha Coombs joins us with the latest. Hi, Bertha. Hey, Court. I don't know if it's going to be two hours. It's still going on, but they said they were only going to take questions for about 15 minutes. We'll see if they extend. In time, though, Palo Alto did beat on the bottom line, reporting adjusted earnings of$1.44 a share compared to$1.28 for the estimate. Topline came in a little shy of expectations at$1.9 billion. Still, it was up 26 % year over year. The company noting that operating margins increased more than 5 percentage points for the full year as it continued to focus on profitability.

1:47And we see that trend in its 2024 guidance once again. On the bottom line, better than expected. They are predicting$5.27 to$5.40 a share, well above consensus. But the revenue, again, shy of expectations at$8.15 billion to$8.2 billion. Street looking for about$8.38. On the conference call, CEO Nikesh Arora talked about signing a large retailer in a$40 million contract for security, displacing a competitor. Maybe this is what we saw with Fortinet, which is what had everybody so nervous about this upcoming report. The company also saying its new product, Ex-Syam, is growing faster than expected and, in fact, shaping up to be its fastest growing offering ever, with pressure on corporations these days to report breaches within four days of happening.

2:39CFO Deepak Galechna, though, noted that the rise in cost of money, higher interest rates is causing customers to seek delayed payments. And those delayed payments were up 45 percent year over year. Nikesh said, though, that it really is helping that they're able to offer a platform strategy, not just one product, get them to do a bunch of things. And the fact that they have invested in their sales force to really put the hammer down is helping them to to succeed at this point. Looks like the call just ended right now, or at least. No, no, it didn't end. Still, I'm sorry. They were on Zoom, interestingly enough.

3:19So I guess that's one of the analysts. Nobody has their cameras up except for the executives. Back over to you. Thank you very much, Bertha. I appreciate it. Lots going on, of course, in that quarter. And Jim Cramer will be speaking exclusively with Palo Alto Network CEO, Nikesh Arora, on Monday. Don't miss that interview, 6 p.m. Eastern, right here on CNBC. Okay, so Steve, you bought a little bit of Palo Alto Networks earlier, but I saw on Twitter you're already done. Yeah, so for me, I bought it around 210, and I bought it in the last half hour to play. I actually was listening. I wanted to buy it earlier, but I felt it was just going to be a binary episode.

3:56I knew there was a chance it could trade down 10 or so dollars and maybe up 20. So maybe not so binary. Right. So there was definitely a little more upside. But I was listening to my good friend Dan Ives on Scott's show. And I said, you know what? Let me just roll the dice here. I think a lot of the bad news has been factored in. Let me take a flyer and buy some stock. Didn't buy a lot. Bought enough to make it worth my while for a 15-minute turnaround. Bought it at$210, sold it at$228.5. So there was, if you look at the chart on this, it traded as high as$255 recently. Traded all the way back down to$200.

4:32Everyone was worried about the Friday call. Everyone was worried about their competitors in the space having weak earnings. So there's so much that was already taken out or discounted in the name that really they had to disappoint dramatically for it to be worth$50 in the stock. I knew there was a shot. This was going to be sort of like a beach ball being held underwater. And you could get that pop after hours. So EPS came in ahead, revenues in line. For me, that was the makings of a pop above. And there's so many times where you see everyone on the wrong side of the boat or the same side of the boat.

5:09And I wanted to take profits in this. There's a good chance that this thing kind of fades down lower. I'm not going to look a gift horse in the mouth. Took my profits. OK, good. So Steve sort of went through the action before the results. Bertha just gave us a rundown of the results. Bono, what do you make from the quarter? And why in the world did they do this on a Friday night? Everyone was expecting bad news. Not so bad in the stocks higher. Well, first off, great trade, Steve. I think that was very well executed. In terms of why they decided to, I really don't know why. I'm not even going to begin to guess.

5:40I mean, for me, there was really no positive setup to doing so. It made me nervous. Clearly, it made Steve nervous. I think it made quite a few investors nervous. Well, you know, why would you do it after hours on a Friday? But when you start to parse the numbers, and I'm going to drag in the last quarter as well, just because, yes, the revenues were slightly light. But if you look at their gross margins are around 70 percent, and they just reported that they increased operating margins by about 5 percent. And all of that, along with the free cash flow, I believe the last 12 months free cash flow was about$2.7 billion.

6:08So all of that helps to offset the fact that they do have customers that are looking to defer payment, because that's going to start to stretch out your working capital. But the fact that they're so free cash flow positive, that allows them to kind of deal with that. And we've talked a lot about the performance of the NASDAQ recently, coupled with what we've seen in terms of rate volatility. And what you want, what you want and what you're getting from this company is ARR growth. And that allows you some visibility into earnings going forward where we're in a very uncertain, as our customers have borne out, very uncertain cost of capital, interest rate, and credit environment.

6:42So I think all that is a pretty positive setup. The last thing I'll say is when I'm looking at these names and I'm looking at forward earnings and multiples, this is about 44 times, which, I mean, I think anyone would agree is pretty expensive. But I think this particular pocket, given the ARR, deserves a premium multiple in a market where perhaps a Nasdaq is starting to underperform a little bit. These are the type of names that I think you can still pay for because they're showing continued growth and profitability. I think it's that coupling there that makes them a bit more impervious to some of the criticism that you're seeing across the board in other Nasdaq names.

7:18OK, lots of good points there. Julie, what's your take on the quarter? And I guess particularly the revenue guidance coming in a little disappointing. But to Bonham's point, it's nice profitability and the forecast is fairly intact for that piece. Yeah, I think that's right. I think expectations on a Friday for sure. I think all of us were just like, oh, that is not a good sign usually. But we're OK here. And I think what they're trying to do is just give themselves a little bit of breathing room in their revenue guidance. You know, have really strong earnings to demonstrate this path to profitability that is actually happening.

7:50We've seen so many software businesses that are under-earning relative to their proper earnings power. And this one is really starting to demonstrate, as most really good quality software businesses go, they tend to be very, very profitable. And what I like about Palo Alto is that with these security devices, you don't rip them out. The switching costs of taking security out are really high. You may add other systems on top of it, but you're not really taking some of this stuff out. So I think there's real durability to their earnings. And I think they've been able to demonstrate that, you know, customers want to buy their products.

8:25And, you know, the product growth and the product margins were super strong, especially if you look at them year over year. I think that's like a pretty compelling setup and, you know, something that has some earnings resilience to it. Yeah, very interesting. I think this is a company. Tim, what do you make about the durability of sort of their earnings and then the ability for the stock to continue higher, even though most of tech continues to be quite pressured in the more macro environment? Well, that fiscal 4Q billings number is the largest number they've had in, I think, ever, certainly over the last seven or eight quarters.

9:00And what the highlight here is just that this is a very different company than Fortinet. I mean, you have a lot of concern. There was a lot of concern on this coming into this number in terms of the virtual firewall and some of their core business. That's not really where Palo Alto is solely focused. And I would just say, as we look across the strength of their business and as you get into both the billings, the stickiness and what folks have talked about here, the highly free cash flow generative nature of the business. I actually don't think it's that expensive. It's certainly not that expensive relative to itself.

9:34So if you put a 21 or two times free cash flow multiple on next year, this is a$250 or$260 stock. It had pulled back 20 % into these numbers. As we've talked about, the weakness was something that I think had people many concerned. And look, if a stock falls on a Friday evening in late August in the summertime and nobody's watching, it still falls. And the opposite is clearly true right now. I mean, there's no question. There's no slip in one past the goalie here. Their business is really solid. And the question is, and we started to talk about this on Fast Money a couple of weeks ago. We brought up, you know, Dan brought up the data dog and some of the dynamics around some of these software companies.

10:18We're starting to see a breakdown of what the market was willing to pay for a lot of them because the growth is still pretty solid. And that's really the question, because this week and last week was a question where if we look at the market more broadly, high multiple tech was really hit. And there's obviously the triple Qs and the semis as groups led the move lower. But it was high multiple stuff in a rising rate environment that suddenly people are almost approaching as they did back in November of 2021 when the market was at its highs. But people were assessing the high multiple tech world.

10:52So that's what you're weighing with Palo Alto because it's best of breed. It's a world-class company. Let's get a little bit more on Palo Alto's results with Joel Fishbein. He's managing director at Truos Securities. He has a buy rating on the stock and a$225 price target. Joel here, I guess we'll start off by saying we're trading above that right now at about$226. Tim thinks this could be worth$250 to$260. So you think you need to up your price target after this result? Well, unfortunately, I can't say what I'm going to do in between now and when the call is over. But I would agree with a lot of what you guys have said on this call so far.

11:27I'm on the call right now. It's been it's actually been broken into two calls. First call is the earnings report. And now they're talking about the mid to longer term forecasts. And I think that's going to be the more interesting part of the call. Ah, OK, I see. That makes that makes a lot of sense. I mean, you have this as a buy rating. And again, you said you can't really tell us what you're going to do. if you're going to make any changes. But from the result, what did you like? And is there anything there that you still have some questions about that you want to hear more about on the second part of the call for the medium to long-term planning?

11:59So we were expecting, or the street was expecting fireworks. We got sprinklers so far, right? I think that that's been the consensus. Frankly, we were in the position, we didn't think that we could announce anything too bad or too major. I don't think the lawyers or the regulators would let them sit on news like that. So what we liked is the free cash flow, really good free cash flow. I think the second part of the call, what they're going to really focus on, that they're a vendor consultory. They are the long term winner in the space. The space is very fragmented. Lots of vendors. Palo Alto is one of the go to companies in the cybersecurity space.

12:31And we think that they're going to grow above the market and expand margins like they're doing for the near to midterm. So I think that's the takeaway of the call so far from our perspective. And I think they're in probably the pole position, best position from a cybersecurity perspective out of almost every company out there. Joe, when you look at revenue by segment, obviously Palo Alto seems to be the top head and shoulders above the rest of the group. What is it about that revenue? Where do you think they have the largest advantage over the competitive space that they actually conduct their business in?

13:07Yes. So the one big takeaway in this report, and I think somebody alluded to it, is their cloud security business. The world's moving to the cloud. We all know that they are in the pole position there. That business is growing 50 percent at scale. It's a two billion dollar plus business growing at 50 percent. That is what's really differentiating them. So they're taking their customers that are already on premise, that have a lot of legacy firewalls, et cetera, and moving them in their journey to the cloud. That's what's really differentiating them and taking them that journey. And that's what they're benefiting from and will benefit from going forward.

13:40We're in the position that we're only probably about 20 to 30 percent through that journey. They're going to be there for their customers, taking them through that. And what they've showed today is not only can they do it and grow above market, they can do it very profitably and expand margins. Now, the biggest question we have, too, going coming out of this call and we'll be asking this of them is, will they need to do more acquisitions to bolster their portfolio to get them to the numbers that they need to hit? Or can they do that with their current infrastructure they have now? My guess is that we're going to see Palo Alto become acquisitive in this in this environment and buy more companies.

14:15Awesome stuff. Jewel Fishbein, thank you very much for joining us. We'll let you get back on the call and ask that question. In the meantime, I'm going to turn to Bono and ask you that question. Do you think that they need acquisitions to continue hitting these targets? I mean, that's that's some of one of the things I want to follow up with him on. Listen, I think it's the lifeblood of their business. They've built themselves via acquisitions. Not that not to say that there has not been organic growth, but this is very much in the DNA of this company. So, yes, I mean, a gun to my head. I certainly think that they're going to be pursuing other acquisitions, particularly in an environment where they're generating so much cash.

14:47So, yes, that's a short answer. OK, I like it. Well, coming up, rates take a break. After six straight days of gains, the yield on the 10-year Treasury finally pulled back from 15-plus-year highs. But how will the recent run factor into the Fed's decision next week in Jackson Hole? Geez Louise, it's already next week. We'll break that down and what to expect next. And later on, on options action, traders intuition. I really flubbed that. How software company Intuit is setting up ahead of its earnings report next week. And how the desk thinks you might want to play it. More Fast Money Into.

15:28Welcome back to Fast Money. Markets sputtering to close out a rough week. The Dow closing marginally higher. But while the S &P and Nasdaq also closed well off their lows of the day, both ended the day down again. Friday's sluggish performance locking in losing weeks for the major indices. The Dow seeing its worst week since March in the Nasdaq, S &P 500, both on a three-week skid. The moves come ahead of another very busy week for earnings and the Fed's annual economic policy symposium in Jackson Hole. Chair Jerome Powell is set to speak next Friday. So what's the trading setup for next week?

15:59Julie, it just seems like the sentiment is decidedly negative here. I think part of it is where we have been. And so the sentiment was so ebullient coming into the last few weeks. And then all of a sudden, it's really turned on a dime. And I think it's literally once all the economists started to capitulate and say, you know what, actually, there probably won't be a recession. And now suddenly, I think, with rates where they are, there's real concerns about what that means for the health of the economy. So it's a pretty mixed picture. You can cherry pick any data to tell you whatever you want about a recession, soft landing, no land.

16:33It's just, it's very mixed data. But I think where the Fed is, is they just really want to get this absolutely right. And in order to do that, they want to fill their entire bingo card. And in order to do that, they're just going to have to hold higher for a really long time. And I think that's going to be the direction of Chair Powell's commentary. Yeah, Tim, I was just thinking that when we got the minutes this week, it seems like you could make a case for the Doves. You could make a case for the Hawks. Not everybody's on the same page. There's still a lot of uncertainty. And I don't think they're going to show us their cards this week on Friday.

17:03So what could we expect from Chair Powell? Or do you agree or disagree with that idea? I don't really feel like there's much he can do to go beyond the expectations he's managed very well. And the data this week tells you there's both sides of this argument. Look, claims numbers this week tell me the labor market hasn't really done much of anything since March. OK, so as much as we expect that the labor markets will come under some pressure, you can't tell me that they have. If you look at the retail sales numbers, we clearly saw a surprise to the upside. But there's no question there was a pullback in discretionary and there was less spending outside of staples and, you know, call it commoditized groups.

17:44So I think the Fed can do very little next week. And I think you have to get back to a market here that going into this move, it was a 20 percent move for the S &P off of that SVB bottom. It was a dynamic that we suddenly ushered in four or five different other ingredients that have put life, put a move higher into the bond market into yields, whether it's China, whether it's the Treasury refunding announcement, whether it's Fitch, rates are higher. Equities are definitely being looked at differently. It's the last five of seven trading days. The markets after a rally in the morning is sold off into the close.

18:18So, again, I just think between the money market flows that are going into that part of the market out of equities, there's a lot of moving ETFs away from market cap weighted to equal weighted. I mean, these are some of the just the data points I'm seeing. And I think equities can trade a bit lower here. It doesn't mean that the Fed has to change course. And I don't think they're going to say anything that will really change the narrative so far. Really quickly, Steve, before we go, any advice for traders for how to set up into the week? Because Jackson Hole's not till Friday. So what happens before then?

18:47Yeah, the market always overshoots, undershoots. And now we're having this period of negativity where there was seven or so stocks that led the way or getting hit the hardest. I think the market will probably level off in the next couple of days. The Fed has the disposal of 400 different economists that work at the Federal Reserve, and they can't tell you when the next recession was. They can't tell you when we had one until we're over one. For me, I'm staying long in this market. I think it ultimately goes higher. I, too, would like to predict things after they've happened. All right, coming up, there's a lot more than just Jackson Hole in the calendar next week, I should say.

19:20We're digging into what's next for retail, what these reports could say about the strength of the consumer, or the weakness, I suppose. You're watching Fast Money Live from the NASDAQ market site in Times Square. We're back right after this.

19:36Welcome back to Fast Money. From sporting goods to department stores, a range of retailers delivering quarterly numbers next week. Could this be a make or break week for the group? Bono, and so far this week, we kind of had some mixed messaging. I would say inventory levels are down across the board. Margins are up. But weak sales in a lot of areas of discretionary, and we've got a ton of players in that sector next week. Yeah, definitely. The discretionary aspect is definitely one that I will be focusing on because there's been so much of inflationary pressure in the core goods segment that you don't have the additional disposable income to kind of go after those things.

20:10But in terms of names, Dollar Tree is one that I'll be focused on specifically only because I think there is a thesis that there is somewhat of a K-shaped recovery and K-shaped strength within the consumer. You have your cohort of wealthier consumer that seem to be doing well. And then you have the less wealthy consumer, which might be under a bit more pressure. And I think Dollar Tree will shed some light on there. On the non-consumer side, NVIDIA will be also in focus only because to the last segment, we just talked about some of the sufferings of the NASDAQ. And I think that name will shed a little bit of light there.

20:39Yeah, very interesting. Obviously, one of the magnificent seven. Julie, how about you? What are you looking for for some of these retail reports? A deeper read on the consumer? Any signals for the Fed? What are you watching? I'm really curious about Nordstrom at this point. You know, this is a business that particularly gets rack. It's kind of off-price business. has just been struggling so hard. And after the really good results out of Ross and TJ, I think I'm curious to see if that business has sorted itself out and also how they're talking about their higher end consumer, if that is gonna be as strong as people are hoping.

21:12I think that's kind of important, figure that out. Absolutely. Tapestry sort of mentioned some softness in the aspirational consumer, which I think is a play there for Nordstrom too. All right, well, I think it's already almost time for the final trader. It is now. That's it. Oh my gosh, here it is. Okay, it's time. Julie, or Tim, you get to start. Okay. Thanks for joining us, Courtney. And I'll just stay here. And I'll say you're a seller of Lulu. They report in a couple weeks. You know, I'm short Nike. I think discretionary. The pull forward, there are 15-month highs. They have not pulled back.

21:4245 trailing, not on this tape. Sell Lulu. All right, sell Lulu. Julie. Aspen is a chemical software company. I think people were really worried about ARR, and it's really looking okay. It's a nice way to play commodities, but with software and good quality. Steve Grasso. Grayscale Ethereum Trust. I've acquired a pretty big position in this one. Every time it sells off, I buy more, more, more. And Bonoan. After a long run, you're seeing some weakness in the home builder space. I think rates are definitely hurting them, but I think you'll get an opportunity to get back in a little bit lower. All right.

22:17Well, don't go anywhere. Options Action is coming up next. All opinions expressed by the Fast Money participants are solely their opinions and do not reflect the opinions of CNBC, NBC Universal, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet, or another medium. You should not treat any opinion expressed on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of an opinion. Such opinions are based upon information the Fast Money participants consider reliable, but neither CNBC nor its affiliates and or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such.