The investment trends of 'Congressional Stock Market Goddess' Pelosi have always been closely watched by the market.

This year, she made her first move and chose the popular stock Palo Alto Networks (PANW) in the cybersecurity industry.

According to the latest disclosure, Pelosi purchased call options for PANW twice in February, with a total option value of up to $1.25 million. The first purchase of $1 million was made on February 12, and the second purchase of $0.25 million was made on February 21.

Why is Pelosi's move worth noting? What's special about the cybersecurity stock she bought? This article will delve into these questions.

Why is Pelosi's move worth noting?

Nancy Pelosi is the former Speaker of the United States House of Representatives, with over 30 years of political experience, and is one of the highest-ranking legislators in the United States.

She has been dubbed 'Congressional Stock Market Goddess' because she and her husband, Paul Pelosi, have earned millions of dollars in wealth from their stock investments in the tech companies they oversee and have achieved high returns.

According to data from Unusual Whales, Pelosi achieved a portfolio return of 65.5% in 2023, significantly outperforming the S&P 500 Index's return of 24.5% and Berkshire Hathaway's return of 15.8%.

In a statement, Christian Cooper, the manager of Congress ETF fund, said that they are skilled in stock trading because he believes that politicians may have access to "internal information" that ordinary retail investors do not know.

Last year, Pelosi made a fortune on the AI leader, Nvidia. On November 22, 2023, she bought call options for Nvidia, and earned $1.4 million within 90 days with these options.

This has sparked increasing interest among retail investors in her investment portfolio and they hope to emulate Pelosi's actions.

As of 2024, Pelosi's latest move is to buy stocks of Palo Alto Networks, a leading cybersecurity company. So the question is: can Pelosi's operation be copied? First, we need to see the quality of this company.

What is PANW?

Palo Alto Networks is an established cybersecurity company founded in 2005, headquartered in Santa Clara, California, USA.

The company released its first independently developed enterprise firewall in 2007 and has maintained a leading position in the enterprise firewall market.

Listed on the NYSE in 2012 and transferred to the NASDAQ market in October 2021. According to Companiesmarketcap data, PANW is currently one of the most influential and powerful leading stocks in the cybersecurity industry, with a market cap of up to $96 billion.

Palo Alto currently has two main product categories: (1) enterprise firewall; (2) cloud security and analytics tools. These products are mainly used to help companies defend against hackers, protect data security, and ensure daily operations.

PANW adopts the same business model as other software companies, namely the SaaS (Software-as-a-Service) model, which charges on a subscription basis rather than a one-time software purchase.

The characteristic of SaaS companies is to acquire new customers and expand market share through large-scale advertising spending in the early stage, which can drive rapid revenue growth but may lead to low profits or even losses. However, as the company accumulates more customers and expands market share, economies of scale will enable SaaS to achieve stable profitability and cash flow.

Therefore, these companies pay more attention to financial indicators including revenue growth and cash flow.

In the 2023 fiscal year, Palo Alto's revenue reached $6.893 billion, a 25% year-on-year growth. In the past five fiscal years, Palo Alto's revenue growth exceeded 20% in four fiscal years. This shows that although Palo Alto has become a leading company in the field of cybersecurity, it has still been able to maintain high growth in the past few fiscal years.

Why did the stock price plummet 28% after Q2 earnings report?

It is worth noting that PANW's stock price has recently experienced a sharp decline.

The Q2 performance for the 2024 fiscal year was announced after market close on February 20, resulting in a significant 28% drop in PAWN stock price on the following day, February 21. This happened to be the date when Pelosi made her second purchase of PANW.

The company's second quarter financial report shows that revenue reached $1.97 billion, a 19.3% year-on-year growth, but the growth rate has further slowed down.

However, what's more important is the future performance guidance. The management's expectations for the Q3 and full-year revenue in 2024 are relatively conservative, falling short of analysts' expectations, which may be one of the reasons for the sharp drop in the company's stock price.

According to the Q3 guidance data provided by the company, revenue growth will further slow down, with a year-on-year increase of 13%-15% to $1.95 billion to $1.98 billion; while analysts' expectations were $2.04 billion.

Why is the company giving such conservative guidance? During the conference call, the management provided two reasons: first, softening business from U.S. government agencies; and second, weak growth in the cybersecurity sector.

Regarding the issue of softening business from U.S. government agencies, the management explained that a previously expected larger project did not achieve the target speed and revenue level as planned, leading them to make relatively conservative estimates for the next few quarters (including Q3 and Q4). It is important to note that these government projects have relatively short durations, exerting a significant impact on revenue in the short term.

They also mentioned that, compared to traditional cybersecurity products, the development of the U.S. federal government market usually progresses slowly in cloud services, and the adoption of next-generation security products is also slow.

Therefore, the significant drop in PANW's stock price after the financial reports is mainly due to the Q3 revenue guidance falling short of expectations, with the underlying reasons being the underperformance of government business sectors and their significant impact on revenue in the short term.

What are the long-term growth prospects for PANW?

According to analysts at The Motley Fool, although PANW's downward revision of expectations has caused panic among investors, artificial intelligence AI may become a key driver of future growth for the company.

According to PANW management's forecast, by fiscal year 2030, driven by artificial intelligence, the annual recurring revenue (ARR) of its next-generation network security products (NGS) is expected to grow nearly fivefold to reach $15 billion.

Therefore, analysts at The Motley Fool believe that as PANW continues to release more AI-related products in the future, revenue growth may further pick up.

In addition, some analysts point out that one potential reason for Pelosi's purchase of PANW stocks may be her belief that the rise of artificial intelligence will benefit cybersecurity stocks and her confidence in the company's future potential.

Potential risks:

For ordinary investors, there may be the following risks if they simply copy others' actions:

Pelosi's holdings information may be misleading: According to congressional disclosure requirements, members of Congress are required to disclose their holdings within 45 days of the transaction. Therefore, when retail investors see the announcement, the holdings data included in it may be lagging, thus misleading retail investors in making investment decisions.

Palo Alto's revenue growth further slows down: Although the company's management believes that AI may be a key driver of its future growth, if the development of AI products does not meet expectations, it may have a negative impact on the company's future revenue and adversely affect stock prices.

Therefore, when making investment decisions, politicians' trades can only be used as a reference and should not be blindly followed; we should consider various factors and make judgments on our own.

Risk disclosure: This content does not constitute a research report, is for reference only, and should not be used as a basis for any investment decisions. The information involved in this article is not a comprehensive description of the securities, markets, or developments mentioned. Although the information source is considered reliable, the accuracy or completeness of the above content is not guaranteed. In addition, no guarantee is given for any statements, opinions, or forecasts provided in this article.