High-Flying Palo Alto Networks Is Going Higher

Palo Alto Networks Beats On Strong Demand 

Shares of Palo Alto Networks NYSE: PANW are certainly highly valued trading at near 80X their earnings but there are a few things to consider. The first is the company continually outperforms high expectations. The second is the company has raised its guidance yet again, citing strong demand across all segments and in particular its Next-Gen security products. The third is that this company is trading at a discount to most other cyber security stocks and could very well undergo a price-multiple expansion even now. If there was ever stock to fit the adage, value is where you find it, it’s Palo Alto Networks. 

Palo Alto Networks Beats And Raises 

Palo Alto had a great quarter beating the consensus estimate by 416 basis points and delivering YOY growth of 32.1%. The $1.25 billion in reported revenue is driven by strength in both products and services with the larger subscriptions and services segment outpacing with growth of 34%. Within that, billings are up 28% for the quarter and are expected to remain at or near this pace for the foreseeable future. 

Moving down the report, there was some contraction in the gross margin but less than expected and it was offset by revenue strength as well. The gross margin contracted about 150 basis points but still delivered strong cash flow and adjusted earnings. The company posted a GAAP loss of $1.06 but that can be entirely attributed to R&D alone. Without that, the company would have posted a GAAP profit. On an adjusted basis, accounting for one-time costs and other factors, the company produced $1.64 in earnings to beat the Marketbeat.com consensus by $0.07. 

The company is expecting to see demand for its products and services to continue strengthening and raised the guidance accordingly. Execs are now expecting revenue growth of 23% in fiscal 2022 versus the previous 21% and for earnings in the range of $7.15 to $7.25 per share. This compares to the Marketbeat.com consensus of $7.24 but the numbers may not be directly comparable due to share repurchase activity. 

The Analysts Are Driving Palo Alto Networks Higher 

The Analysts community liked what it saw in the Palo Alto report. At least 15 sell-side analysts have come out since the report was released and they are all raising their price targets. Most of the new targets are in the range of $600 to $630 compared to the Marketbeat.com consensus target of $575 but there are some things to know. First and foremost, the consensus price target is up almost 100% in the last 12 months and 11% in the last 30 days so there is a powerful tailwind pushing this market higher. Based on our assessment, we don’t think that tailwind will subside soon. The high price target of $675 is more in line with our view and it could be reached within the next few quarters. 

The Technical Outlook: Palo Alto Networks Is Trending Higher 

Shares of Palo Alto Networks had a bit of a volatile session in the wake of the Q3 report but, ultimately, set a maintained a new all-time high. With a strong uptrend in place, the worst we think may happen now is a short period of consolidation before the next move higher. For now, key support is the short-term moving average. We’d expect to see it produce a bounce when reaches and to eventually drive the stock upward.