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Mar 6, 2017

S3 BLACKLIGHT: Palo Alto Networks is March’s Most Profitable Short

Palo Alto Networks Inc.’s (PANW US) stock price is down 24% in March, following a 21.5% rally in January and February. PANW reported weak Q2 results with EPS of $0.63, beating expectation by $0.02, but revenues of $422.6 million missed the consensus target of $429.7 million.  This revenue slowdown is expected to continue as PANW lowered Q3 guidance for both EPS ($0.54-0.56 vs. consensus $0.65) and revenues ($406-$416 million vs. consensus of $454 million).

Even as cloud computing continues to expand, cyber security spending has slowed over the last year. PANW is experiencing strong competition in this sector from old school competitors such as Check Point Software Tech (CHKP US) and newer competitors such as Cisco Systems (CSCO US). Several analysts have downgraded PANW recently, with BMO lowering its target price to $132 from $160.

PANW short interest had been trending down in late 2016 after hitting its historical high of $1.3 billion in mid-October. Short interest at year end 2016 was down 39% from its high to $832 million. Short sellers began rebuilding their short positions in late January as PANW’s stock price rallied. By mid-February, PANW short interest had climbed to $1.2 billion, up 35% for the year, as its stock price rose over 24%. Short sellers did not have to wait long for their bets to pay off as PANW’s stock price fell 24% on February 1st after reporting poor Q2 results. PANW short interest is currently $806 million as short sellers have been buying to cover to lock in their profits after this month’s $37 decrease in stock price.

PANW has been a favorite for short sellers for over a year. PANW’s stock price fell 29.01% in 2016 and short sellers had an average position of $916 million, earning them $240.2 million in net of financing mark to market P/L for a return of 26.21%.

2017 continues to be a good year for PANW short sellers who did not cover their positions as the stock rose 21.47% in January and February. After being down $181.1 million, or 17.35%, in the first two months of the year, shorts were up $265.9 million, or 29.44% in the first week of March. In aggregate, shorts are up $84.8 million, or 8.20%, in year-to-date 2017.

PANW short covering is not relenting as traders continue to close out their shorts and realize their recent gains. We should continue to see short interest decreasing as levels are nearing 2016 lows. If short interest blows past 2016’s $750 million support level, we may see buy to covers continue till we near 2015’s average short interest of $650 million.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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