Palo Alto Networks Stock Serves Up Discount After Q4 Results

Investors Pause After Palo Alto Gives Soft Guidance

Palo Alto Networks (NASDAQ:PANW) is one of the better-positioned companies in today’s age of digital expansion. The more complex and pervasive digitization becomes the less safe it is to use which makes digital security of utmost priority. The need for digital security can be seen in Palo Alto’s FQ2/CQ4 results but there is a problem for the market. The results were fantastic but nothing more than the market was expecting and that is a bad thing for share prices. With results already discounted into prices and guidance a little weak, it’s time for some investors and traders to trim profits, rotate into other names, or take advantage of a bearish opportunity. What long-term holders and potential buyers need to remember is that near-term weakness is a long-term opportunity for growth.

"The momentum in the business continues to be strong, with second-quarter revenue growth of 25% year over year to over 1 billion USD, driven by strong execution across the board," says CEO Nikesh Arora. "Events like the SolarStorm attack highlight the importance of cybersecurity, and Palo Alto Networks is well-positioned to protect our customers with best-of-breed solutions. We are excited about the bets that we have made in SASE, Cloud and AI. Our three-platform strategy is paying off."

Palo Alto Has Good Quarter, Mixed Results

Palo Alto is suffering a malaise that seems to be spreading through the market. The Q4 results were great, revenue grewnearly 25% on a YOY basis to not only accelerate from the prior quarter but for growth to have accelerated from last year’s +15%, and yet failed to impress the market because the $1.02 billion was roughly in-line with the consensus. Add to that slightly weaker than expected guidance for the coming quarter and the stage was set for a sell-off. The upshot is that guidance for the full year is better than expected which leads us to think the dip in prices is only temporary.

On a segment basis, the company’s core subscription and support revenue saw its revenue grow 34% from last year. Products, a much smaller portion of net revenue, were also up with a 3.3% gain. Billings increased 22% over the last year, accelerating from 17% in the 2020 Q2 period, and point to accelerated growth later in the year. Deferred revenue grew 30% to $4.2 billion and also suggests accelerating revenue. Moving down to the earning portion of the report, gross margins expanded by 150 basis points although other factors lead to less than expected GAAP earnings.

On a GAAP basis, the -$1.48 in reported EPS missed consensus by $0.69 due to increased R&D and marketing, as well as higher SG&A and interest expense. On an adjusted basis EPS came in at $1.55 or $0.12 better than consensus.

The Analysts Are Already Chiming In

Not one but two analysts have already upped their targets and/or ratings in the wake of the Palo Alto Networks report. Analysts at BMO upped the rating to Outperform from MarketPerfom citing the company’s valuation, position within the market, and potential for market share gains. They also upped the price target to $455 compared to the consensus $360. The BMO target is not the highest on Wall Street, that’s $515 set by Morgan Stanley, but it does highlight the uptrend in consensus figures.

Looking at the charts shares of PANW are still in an uptrend despite the premarket fall in price action. Shares are indicated to open above the 30-day EMA support level which is the key level to watch. If support can maintain the 30-day moving average the uptrend may enter a sideways consolidation before moving higher. If the price action falls below the EMA a deeper pullback may be in the works. The next targets for support are near the $360 and $340 levels.