• Analysts downgraded Palo Alto Networks shares as the company cited weakness in its U.S. government base.
• CEO Nikesh Arora said on a Tuesday call with analysts that growth will be slower as Palo Alto works to get clients using multiple products.

Palo Alto Networks shares dropped 28% on Wednesday, the worst trading session since the cybersecurity hardware and software maker's 2012 initial public offering. The plunge came a day after the company reduced its full-year revenue guidance.

The stock doubled in value in 2023 as cyberattacks against 23andMe, Chinese bank ICBC, MGM Resorts and other entities inspired organizations to keep spending on security. That's despite broad efforts by information technology departments to find ways to save money because of concerns about the economy.

U.S. government agencies have been working to boost their protective measures after a 2021 executive order. But a major federal contract "didn't materialize at the pace and at the spending levels we had expected" during the quarter, Nikesh Arora, Palo Alto's CEO, said on a Tuesday call with analysts.

The company lowered its full-year billings outlook to a range of $10.1 billion to $10.2 billion, from $10.7 billion to $10.8 billion. The revenue guidance moved to a range of $7.95 billion to $8 billion, from $8.15 billion to $8.2 billion.

Most of the updated billings forecast is related to the Defense Information Systems Agency's $1.86 billion Thunderdome project to implement a zero-trust architecture, Wells Fargo analysts Andrew Nowinski and Stefan Schwarz wrote in a note to clients. They maintained their buy-equivalent rating on the stock but lowered their 12-month price target to $385 from $450.

The analysts wrote that additional effects to billings derived from Palo Alto's continuing push toward platformization, or trying to get customers using multiple products from the company. The idea is to position the company well for the long term.

"We expect a typical customer entering into a platformization transaction will not pay us for our technology for a period of time," Arora said. "As these programs ramp up over the next year, we expect a change to our billings and revenue growth for the next 12 to 18 months. As customers move into the period [with] contracts of full billing and revenue contribution, we expect to see an acceleration in our top line metrics."

The demand picture hasn't changed much in the past few quarters, Arora said. Higher geopolitical stress is leading nation-states to increasing wage attacks on national infrastructure, he added.

But what's new is "we're beginning to notice customers are facing spending fatigue in cybersecurity," Arora said.

Loop Capital and Rosenblatt Securities downgraded the stock after the report.

— CNBC's Rohan Goswami contributed to this report.

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