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Palo Alto Networks (PANW) and Cisco (CSCO) both reported after the bell and it would seem investors were unimpressed with what they learned. PANW reported adjusted EPS of $1.38, a record (GAAP earnings were 56 cents per diluted share), and $1.95 billion in revenues, also a quarterly record. Both numbers topped estimates, and still the stock fell after hours, trading below $240 a share as of this writing. Revenue guidance for the current quarter merely hit the midpoint of consensus expectations and the company lowered full-year 2024 “billings” by $200 million. Unanticipated slowing of growth is never well received by investors. Particularly investors who had unbridled enthusiasm, as the company’s 85% year-to-date gain suggested was the case here. At nearly 9 times revenues and 45 times forward earnings estimates, PANW is not a cheap stock, moreover it is still up sharply on the year, and outperforming considerably. If you own it what does one do here? Stock replacement strategy One possibility is a stock replacement, selling one’s stock holding and replacing that exposure with options. Implied volatility, the price of options, was elevated going into earnings in anticipation of a sharp move, which we’ve now seen. By using a call spread one can maintain some exposure to the upside in the event the stock bounces back. In this example, the trader sells the $270 call and buys the $250 call, both of January expiration. Notice that by selling a higher strike call one reduces the cost of the structure, but observe too the strike that was selected. The $270 strike is above the $265.90 high of mid October, and breaking through that level soon now seems quite unlikely as that presents a level of resistance. The logic is that one could book some nice gains year-to-date while avoiding the hazard that today’s declines are the start of a downtrend. PANW YTD mountain Palo Alto Networks (PANW) CSCO on the other hand, by some measures at least, is a cheap stock, at just 13 times earnings. So the 10% after-hours decline reflects real dismay by an already disenchanted group of investors. The decline, assuming CSCO continues to trade around this level, erased all the gains on the year. There are really two concerns embedded in these results, the first naturally relate to Cisco itself. The $12.6 billion to $12.8 billion in forecast revenues for the period ending in January 2024 is a pretty shocking 10% below consensus. Note that the revenue guide might help explain the magnitude of the share price decline. A bigger concern or takeaway investors might have looking at this data, is that there is a big slowdown in corporate spending. The company’s CEO, Chuck Robbins attempted to temper that concern by suggesting it was partially due to unloading “billions of dollars more of equipment than we would normally ship”. CFO Scott Herren said the company expects “product order growth rates to accelerate in the second half.” Perhaps, but I don’t know that it makes sense to dismiss a revenue miss of this magnitude so easily. AT & T, Verizon, T-Mobile and Comcast rank among Cisco’s largest customers. Arista Networks, Broadcom and Ciena among their peers, and Flex, Nvidia (which we own by the way) and Jabil among the company’s suppliers. Of these, ANET has reported earnings, and traded very well out of it, but AVGO and CIEN will be reporting the first week of December. A stock replacement, like the one illustrated for PANW might be worth considering ahead of these earnings, even though options premia are slightly elevated. DISCLOSURES: (none) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer. Comcast owns NBCUniversal, the parent company of CNBC.
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