Former U.S. House Speaker Nancy Pelosi recently disclosed that buying up to $1.25 million in $200 strike call options on Palo Alto Networks (PANW), a major cybersecurity company.
These trades happened on February 12th and 21st. This move has caught the attention of regular investors, who wonder if Pelosi had insider information that made her confident about PANW's future.
In this article, we'll discuss why did Nancy Pelosi's move raised eyebrows among retail investors, and what you should know about PANW.
Nancy Pelosi, the former Speaker of the U.S. House of Representatives, has been a politician for over three decades.
Pelosi and her husband, Paul Pelosi, have made millions off tech companies that she’s responsible for regulating.
According to data from Unusual Whales, Pelosi's investment portfolio yielded an impressive 65.5% return in 2023, surpassing the S&P 500 index's 24.5% and Berkshire Hathaway's 15.8% returns.
Christian Cooper, a manager of ETF funds, suggested that politicians may have access to "inside information" unknown to ordinary retail investors, explaining their adeptness in stock trading.
Last year, Pelosi made a significant profit on the AI leader, NVIDIA. On November 22, 2023, she purchased call options on NVIDIA, earning $1.4 million within 90 days.
This has further stirred interest among retail investors in Pelosi's investment portfolio, as they hope to replicate her strategies.
Entering 2024, Pelosi's latest move is purchasing stocks of Palo Alto Networks (PANW), a leading cybersecurity company. So the question arises: will Pelosi's move pay off this time? Firstly, it depends on the quality of the company.
Palo Alto Networks, established in 2005, is a veteran cybersecurity company based in Santa Clara, California, USA.
Since introducing its first enterprise firewall in 2007, the company has been a top player in the market.
Originally listed on the New York Stock Exchange in 2012, PANW later moved to the NASDAQ in October 2021. With a market capitalization of $94.06 billion, PANW is now one of the most influential cybersecurity stocks, according to Companiesmarketcap data (as of March 6th, 2024).
Palo Alto offers two main product categories: enterprise firewalls and cloud security and analytics tools. These products help businesses defend against hackers, secure data, and maintain daily operations.
Following a Software-as-a-Service (SaaS) model, PANW gains revenue through subscriptions rather than one-time purchases.
SaaS companies, like PANW, initially spend heavily on advertising to acquire customers, leading to rapid revenue growth. However, this can result in lower profits. Yet, as the customer base grows, economies of scale lead to stable profits and cash flow.
Hence, such companies focus on financial metrics like revenue growth and cash flow.
In fiscal year 2023, Palo Alto's revenue hit $6.893 billion, growing by 25% year-on-year. Over the past five years, revenue growth exceeded 20% in four years. This indicates sustained high growth despite PANW's leading position in cybersecurity.
PANW's stock recently took a big hit.
Their Q2 FY2024 results were announced after the market on February 20th, causing PANW's stock to drop a whopping 28% the next day (February 21st). Interestingly, this was when Pelosi made her second PANW purchase.
While Q2 revenue hit $1.98 billion, a 19.3% increase year-on-year, growth slowed down further.
But what spooked investors was the cautious outlook for Q3 and full-year 2024 revenue, according to the Motley Fool's analyst. It fell short of analyst expectations, likely triggering the stock plunge.
The company's Q3 guidance suggests revenue will grow 13%-15%, reaching $1.95 billion to $1.98 billion, lower than analysts' $2.04 billion estimate.
Why such conservative guidance? Management cited two reasons during the earnings call: firstly, weakness in the US federal government's market; and secondly, sluggish growth in the cybersecurity sector.
Regarding the softness in US Federal government business, management explained that a previously anticipated significant program failed to achieve the expected pace and revenue level, leading them to make relatively conservative estimates for the next few quarters (including Q3 and Q4). It's worth noting that these government projects' contracts have relatively short durations, hence exerting significant influence on revenue in the short term.
They also mentioned that the U.S. federal government market typically progresses slowly in cloud services and adopts next-generation security products at a slower pace compared to traditional cybersecurity products.
Thus, it's evident that the sharp decline in PANW's performance post-earnings was mainly due to the lower-than-expected Q3 revenue guidance, driven by underperformance in government business segments causing significant short-term revenue impact.
Analysts at The Motley Fool believe that although PANW's recent downgrade in expectations caused investor panic, artificial intelligence (AI) could drive the company's future growth.
PANW's management forecasts that by the fiscal year 2030, AI advancements will boost the annual recurring revenue (ARR) of their next-generation security offerings (NGS) nearly fivefold to $15 billion.
Thus, The Motley Fool analysts suggest that as PANW introduces more AI-related products, revenue growth might pick up.
Furthermore, some analysts speculate that Pelosi's PANW stock purchase could stem from her confidence in AI's rise benefiting cybersecurity stocks and in the company's future potential.
For ordinary investors, blindly following others' investment moves may pose the following risks:
Misleading Holdings Information: According to congressional disclosure requirements, members of Congress need to disclose their holdings within 45 days of trading. Therefore, when retail investors see the announcement, the disclosed holdings data may be outdated, potentially misleading them in making investment decisions.
Further Slowdown in Palo Alto's Revenue Growth: Despite management's belief that AI could be a key driver of future growth if AI product development falls short of expectations, it could negatively impact the company's future revenue and adversely affect its stock price.
Therefore, when making investment decisions, politicians' trades should only serve as reference points, and blindly following them is not advisable. We should consider various factors and make our own judgments.
Additional Disclosures: This content is also not a research report and is not intended to serve as the basis for any investment decision. The information contained in this article does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Furthermore, there is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct.
