Jim Cramer blasts warnings from a competitor, says buy cybersecurity leader Palo Alto Networks

Published Fri, Nov 3 20231:15 PM EDT

Despite doom-and-gloom from a competitor around cybersecurity spending, Jim Cramer said Friday that it's the perfect time to buy industry leader Palo Alto Networks (PANW), considering the onslaught of recent high-profile hacks and breaches. Cybersecurity stocks came under pressure Friday, the day after Fortinet (FTNT) gave a dismal forecast of weaker client spending as part of its latest earnings report. Fortinet plunged 16%, while shares of Palo Alto Networks tumbled more than 3%. However, we're questioning whether the Fortinet warning is indicative of an industry trend or a company-specific problem. We think the latter and history may be on our side. That's because this exact situation played out back in August — a Fortinet bomb dragged down the group — and we were rewarded, at the time, for our faith in shares of Palo Alto Networks. The company later turned in a solid fiscal 2023 fourth quarter and the stock soared , putting it on a path to reaching an all-time high on Oct. 13. Like last time, Palo Alto doesn't report its latest quarter until Nov. 15. It's time to use Palo Alto's dip on Friday and nearly 9% decline since its record to buy the stock because "the fault is in Fortinet, not in the stars," Jim said on "Squawk on the Street," meaning not the entire industry. Fortinet's troubles don't change the Club's bullish outlook on Palo Alto or the demand for its products. "Fortinet reported just a miserable quarter," Jim said. "They blamed the slowdown of the industry. That is so false. It's palpable." PANW YTD mountain Palo Alto Networks (PANW) year-to-date performance In fact, companies need the services of cybersecurity specialists, Palo Alto, more than ever nowadays. Over the past several months, there's been renewed attention on safeguarding information technology systems after a number of major companies found themselves targets of cyber criminals. In July, Club name Estee Lauder (EL) said its business operations would be disrupted because a hacker had obtained data from the cosmetic maker's systems. As we've reported extensively, Estee Lauder has had a host of problems with their actual business so it's unclear how much, if any, of the recent declines in the stock can be attributed to the breach. However, during this week's post-earnings call, CFO Tracey Thomas Travis blamed cyberattack disruptions for diluting earnings-per-share by 8 cents. Estee Lauder on Wednesday reported its fiscal 2024 first-quarter results, which included an over 90% year-over-year decline in EPS to 11 cents. On Oct. 4, Clorox's (CLX) pre-announced that fiscal 2024 first-quarter net sales and adjusted earnings-per-share would be negatively affected by operational disruptions due to a previously divulged cyberattack back in August. The bleach and cleaning products maker reported fiscal Q1 results Wednesday evening. On the post-earnings conference call, CEO Linda Rendle said, "While we're not yet back to normal, we are now on a solid path to operational recovery. But this will take some time." Since disclosing the attack on Aug. 14, Clorox shares have lost 23% or nearly $4.7 billion in market value, as of Thursday's close. Clorox shares bounced with the broader market Friday for a market cap of roughly $15.74 billion, according to FactSet. On Oct. 20 , identity management company Okta (OKTA) said its support systems were hacked. Since then, Okta shares have lost 20% or nearly $2.9 billion in market value as of Thursday's close. Okta shares recovered Friday for a market cap of roughly $11.44 billion, according to FactSet. Okta and its products have been tied to other breaches, including a spate of intrusions at casinos that crippled Las Vegas hotel rooms for days. Boeing (BA) said Wednesday evening it is investigating claims a cybercrime gang made Friday that the group stole sensitive data from the aircraft maker. Boeing said some of its parts and distribution businesses were affected. The company said, "This issue does not affect flight safety." Unlike the Clorox and Okta situations, Boeing shares have been not adversely impacted. The stock, as of Thursday's close, was on a six-session winning streak. It was higher during the trading session Friday as well. Needless to say, these incidents have added a heightened sense of urgency around cybersecurity. Cramer said Palo Alto Networks stands to benefit. Palo Alto is "just kind of unstoppable," he said recently. Despite the small selloff Friday, Palo Alto shares were still up about 74% year-to-date. The stock is the Club's third-best performer in 2023. At a time of macroeconomic challenges with interest rates at near 22-year highs and recession fears continuing to linger, businesses still need protection from looming hacks and breaches. That's where Palo Alto comes in. Jim said, "Those who are looking for bull markets … look at cybersecurity." Palo Alto has captured market share because the company offers protection for so many different attack vectors, meaning businesses can save money by consolidating their security needs under one platform. Jim has called it the only "real soup-to-nuts cyber play ." Wall Street's echoed the Club's sentiments. Last week, Needham initiated coverage of Palo Alto with a buy rating. "[Palo Alto] has transformed itself into a stalwart in cybersecurity as the leader in network firewalls with [greater than] 25% and growing market share," the analysts wrote in an Oct. 25 research note. "In a tight macro and security sector ripe for consolidation, we think [Palo Alto] is an execution machine that will see durable share gains, revenue growth and [fresh cash flow]/share expansion." Bottom line Palo Alto has more diversified and less cyclical revenue channels than its rivals — enabling the company to serve larger players with more scale. When Palo Alto issues earnings later this month, we'll be looking out for any commentary around continued share gains and IT budgets, along with the pace of deal activity. Free cash flow will also be important. While we do leverage fiscal results by peers like Fortinet to get a sense of how companies are doing before they report, one firm's commentary isn't always telling of the entire sector. That's particularly true when market share is shifting as we know to be the case in the cybersecurity industry due to ongoing consolidation efforts. Again, as Jim said and our Club's 1-rating indicates, Palo Alto is buy. Jim added he would buy some Palo Alto next week if the stock is still down around the current price in the low $240s and we aren't restricted. (Jim Cramer's Charitable Trust is long PANW, EL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Signage outside Palo Alto Networks headquarters in Santa Clara, California, U.S., on Thursday, May 13, 2021.

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