Palo Alto Networks Leads Cloud Security Stocks Higher

Palo Alto Networks (NASDAQ: PANW) is a well-established blue-chip quality tech player and yet still a driving force in next-generation cyber security technologies. The company’s Q4 results and outlook prove that not only is demand for cyber security still strong but the company is in one of the best positions it has ever been in. Trading at 69X its earnings, it may seem like an expensive stock but remember, the company is growing at a solid and sustained high-double digit rate and its competitors are trading at much higher valuations. Crowdstrike (NASDAQ: CRWD), which is closest in size by market cap but still trailing revenue by a large margin, trades at over 150X its earnings while newcomer Zscaler (NASDAQ: ZS) trades at a whopping 251X its earnings. Both Crowdstrike and Zscaler are growing at a much faster rate but, as stated, lagging in terms of total revenue and their growth is well-priced into the market. 

Palo Alto Networks: Next-Generation Security Is In-Demand 

Palo Alto Networks reported a solid quarter driven by strength in both the products and services segments. The company brought in $1.55 billion in net revenue for a gain of 27% over last year. The revenue beat the consensus by a slim $0.010 billion or 65 basis points with sales in the products category outpacing services. On a segment basis, product sales increased by 27% to account for 26.4% of the net while subscriptions and services revenue grew by 27%. Zscaler, the fastest growing of the bunch, grew its revenue by nearly 70% YOY for the last reported quarter but its revenue is only worth about 18% of what Palo Alto is bringing in. Zscaler is sure to continue growing but growth will decelerate fastest for it and even without slowing it will be many years before Zscaler compares in scope. 

Moving down to the income, the company reported improvement in both the GAAP and adjusted earnings. The GAAP margin came in positive versus last year’s negative showing and put an end to a 4-year streak in GAAP operating losses. The adjusted operating margin is an even better story and widened by 310 bps YOY to 16.3%. This drove earnings of $2.39 or $0.011 better than expected and contributed to the stock's meteoric rise in premarket trading. The guidance is another catalyst for share prices as it is favorable in regard to both the Q1 and FY outlook. The real takeaway from the guidance, however, is that business is expected to start strong in Q1 and strengthen by the end of the year. 

Palo Alto Networks Returns Capital To Shareholders 

Palo Alto Networks doesn’t pay a dividend but it does buy back shares and there is some other good news as well. The company announced a 3-for-1 stock split that will not only reduce the market value of the shares and thereby make them more accessibly to a wider number of market participants but is also supported by an increase in the buyback program. The board approved a $0.915 billion increase to the program that is expected to be used over the next 16 months. This brings the remaining amount back up to $1.0 billion which is worth 2% of the market cap to investors. 

Analysts Help Drive Palo Alto Networks Higher 

The analysts are taking note of Palo Alto Networks' results and have issued an overwhelming vote of approval. At least 16 of the 34 analysts covering the stock have come out with commentary that includes 16 price target increases. The consensus of the group is a Moderate Buy with a price target of $650 which is about 28% above the pre-release price action. The high target of $823 adds another 26% to the consensus target and both figures are trending strongly higher. Assuming this trend continues, Palo Alto Networks could hit a new high fairly soon. 

Turning to the chart, the price action in PANW is up about 10% in the premarket action and trading at a four-month high. The move is trend-following in the long-term and supported by the indicators so a move up to the $625 region should be expected. A break to new highs would be bullish, however, and could lead to another $125 or 20% of upside.