Palo Alto Networks Accelerates To New Highs

Double-Digit Growth At Palo Alto Is Unstoppable 

Palo Alto Networks (NYSE: PANW) is a poster-child for what has become our favorite theme in post-pandemic stocks. Companies like Palo Alto Networks had already been shifting, restructuring, refocusing, and reinvigorating their businesses in an effort to position themselves for growth. These same companies were and are also in a perfect position to capture secular trends that were either sparked or accelerated by the pandemic. In the case of Palo Alto Networks, this means shifting away from the lower growth, lower margin product side of the business and toward the higher growth, higher-margin cloud security services. Now, a year later, the company is sustaining a high-double-digit growth rate with no end to its growth in sight. 

Palo Alto Networks Rockets Higher On Expected Results 

Shares of Palo Alto Networks are rocketing higher in early trading despite the fact its results were only as expected. We mention this because the market has not been rewarding as-expected results no matter how good they are. In this case, Palo Alto Networks reported $1.07 billion in quarterly revenue, or 23.1% higher than last year and about 90 basis points better than the consensus. The mitigating factors we see include the fact this is the 5th quarter of revenue acceleration, the 20th quarter of double-digit growth, the second-highest quarterly revenue in two years, and internal metrics point to another accelerating in the fiscal 4th quarter. 

On a segment basis, Product revenue increased by 2.8% over last year while Subscription & Services grew a much more robust 34% to account for 74% of net revenue. This is up 600 basis points from last year as a percentage of revenue and that figure should continue to grow over the coming quarters. Metrics that point to further accelerating include Q2 billings which are up 27% from last year and Deferred Revenue which is up 30%. 

Moving down the report the company’s revenue strength carried through to the bottom line but GAAP and Adjusted EPS is a bit mixed. The company posted a much wider than expected GAAP loss but that is offset by the fact most of it can be attributed to increased and high levels of ad and R&D spending. If not for that GAAP earnings would have been positive. On an adjusted basis, accounting for stock-related compensation and other one-time costs, the company reported $1.38 in EPS which beat the consensus by a dime. 

Palo Alto Networks Guides Higher 

Palo Alto Networks issued updated and improved guidance based on the Q3 results. The company is expecting to see revenue accelerate sequentially to $1.165 to $1.175 billion with adjusted EPS in the range of $1.42 to $1.44. That's equal to more than 18% YOY revenue growth at the low end of the range and above the consensus but the EPS is only in line with the Wall Street estimate. Based on what we’re seeing digital we think this estimate is too low but we’ll see about that. 

"The work-from-home shift earlier in the year and recent cybersecurity issues have increased the focus on security. Coupled with good execution, this has driven great strength across our business, with Q3 billings growth accelerating to 27% year over year. In particular, we saw a number of customers make large commitments to Palo Alto Networks across our three major platforms," said Nikesh Arora, chairman and CEO of Palo Alto Networks. "We are pleased to be raising our guidance for fiscal year 2021 as we see these trends continuing into our fiscal fourth quarter, bolstering our confidence in our pipeline."

The Technical Outlook: Range-Bound Palo Alto Networks Moves Higher 

Shares of Palo Alto Networks have been in a trading range since late last year and that situation has not changed. What has changed is the price action put in a bottom at the $320 level and is moving higher within the range. Because this movement is supported by good results and a good outlook we think the stock can go higher. If the market can get above $372 the next target is the $400 level and a possibly new all-time high.