Palo Alto's Q3 guidance falls short

Palo Alto Networks & the Impact of AI on the Software Sector - Interview with Matthew Tuttle

Key Concepts:

• Agentic AI: Artificial intelligence capable of autonomous action and decision-making.
• Thematic Investing: Focusing investments on specific, long-term trends or themes (e.g., cybersecurity, AI).
• Mag 7: Refers to the seven largest US technology companies (Microsoft, Apple, Nvidia, Amazon, Google/Alphabet, Tesla, and Meta).
• Toll Booth Companies (in AI context): Companies positioned to benefit from the growth of AI by providing essential infrastructure or services along the AI value chain.
• MEMY: An ETF (Exchange Traded Fund) managed by Tuttle Capital Management, focusing on 20 thematic investment ideas.
• MGO: An ETF managed by Tuttle Capital Management, focused on the "Mag 7" stocks.

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I. Palo Alto Networks & Cybersecurity Sector Overview

The interview began with a discussion of the recent pressure on Palo Alto Networks (PANW) shares, triggered by a disappointing third-quarter forecast and broader concerns about the impact of Artificial Intelligence (AI) on the software sector. Matthew Tuttle, CEO and CIO of Tuttle Capital Management, acknowledged the initial positive outlook for cybersecurity, noting its perceived resilience due to increasing demand. However, he expressed a preference for CrowdStrike (CRWD) over Palo Alto Networks within the cybersecurity space. He stated his firm, through its MEMY ETF, includes CrowdStrike among its 20 top thematic ideas.

Tuttle believes the entire cybersecurity sector has been negatively impacted by the software selloff, but anticipates increased demand for cybersecurity solutions because of AI, and especially if quantum computing becomes a reality. He indicated a willingness to buy Palo Alto Networks on weakness, but reiterated CrowdStrike as his firm’s preferred pick. Both stocks have experienced declines alongside the broader software sector.

II. The Software Sector Selloff & AI Disruption

The downturn in cybersecurity stocks is symptomatic of a wider correction within the software sector. Tuttle explained that the initial surge in software stocks fueled by AI hype last year led to overvaluation. Investors are now differentiating between companies that will benefit from AI and those that are likely to be disrupted by it, resulting in a broad “sell everything in software” reaction.

He emphasized that this selloff presents an opportunity to selectively invest in companies poised to thrive, while avoiding those vulnerable to AI-driven automation.

III. Companies to Avoid: Vulnerability to Agentic AI

Tuttle identified several specific companies he believes are particularly susceptible to disruption by Agentic AI:

• DocuSign (DOCU): He believes DocuSign’s core functionality – electronic signature and document workflow – will be easily integrated into agentic AI workflows, rendering its services redundant. He stated, “DocuSign is a lifesaver for me today, but it's one of those stocks that I think once Agentic AI fully comes online, it's going to be very easy for them to integrate what DocuSign brings to the table into that workflow.”
• monday.com (MNDY): Any workflow application that Agentic AI could readily incorporate is considered a risk. Tuttle advised avoiding companies like monday.com.
• EPAM Systems (EPAM): He strongly recommended avoiding IT services and outsourcing companies like EPAM, predicting that AI will increasingly handle IT tasks currently performed by outsourced providers. He shared his own experience of using AI to automate tasks previously handled by his company’s outsourced IT provider, suggesting a future where AI replaces these services. He stated, “anything outsourced, anything outsourcing I think AI and agentic AI can can take that over.”

IV. Companies with Potential: Snowflake & the "AI Toll Booth" Concept

In contrast to the companies to avoid, Tuttle highlighted Snowflake (SNOW) as being less vulnerable to AI disruption. He described Snowflake as a potential “toll booth company” within the AI ecosystem – a company that provides essential infrastructure or services that AI applications rely on. He clarified that while his firm doesn’t currently hold Snowflake in client portfolios or ETFs, he wouldn’t be averse to buying the dip.

V. The "Mag 7" & Microsoft (MSFT)

Tuttle addressed the performance of the “Mag 7” tech giants, particularly Microsoft. He explained that his firm’s MGO ETF is specifically designed to capitalize on these companies. He believes that Microsoft, as a behemoth in the tech industry, is a strong beneficiary of the AI revolution and represents a buying opportunity during market dips.

He articulated a contrarian investment strategy: “we look at whenever people tell you the Mag 7 is dead and it's going to be the other 493 companies in the S&P, that's when I want to buy the Mag 7.” This strategy is based on the belief that the Mag 7 companies are fundamentally strong and will continue to dominate the market despite short-term volatility.

VI. Logical Connections & Overall Perspective

The interview followed a logical progression, starting with a specific stock (Palo Alto Networks) and expanding to a broader discussion of the software sector and the impact of AI. Tuttle consistently framed his analysis through the lens of Agentic AI, identifying companies vulnerable to disruption and those positioned to benefit. He emphasized the importance of thematic investing and identifying long-term trends.

Conclusion:

Matthew Tuttle presented a nuanced perspective on the current market environment, arguing that the AI revolution is creating both risks and opportunities within the software sector. He advocated for a selective investment approach, favoring companies that provide essential infrastructure for AI (like Snowflake) and the dominant tech giants (the Mag 7, particularly Microsoft), while avoiding companies whose core functionalities are likely to be automated by Agentic AI (like DocuSign, monday.com, and EPAM). His core message is that understanding the disruptive potential of AI is crucial for successful investing in the current market.