Palo Alto Networks: the one security stock to rule them all

Key Points

• Palo Alto Networks fell more than 5% on a solid report opening up the next buying opportunity. 
• Results outperformed and profit guidance was raised. 
• The sole shortfall is in expected billings which are impacted by the cost of money. 

There are many ways to secure digital networks, not just Palo Alto Networks NASDAQ: PANW, and all provide some utility for investors. However, the takeaway from the cybersecurity market is that Palo Alto Networks is the one to rule them all. While others may focus on devices, end-points, accessibility, or the cloud, Palo Alto Networks is strong in all segments. And it’s growing like mad. 

Palo Alto’s 20% growth in Q3 is less than Zscaler’s NASDAQ: ZS 40%, Crowdstrike's NASDAQ: CRWD 36%, and Cloudflare’s NYSE: NET 32%, but it’s a significantly larger company and outperforming where it counts. A 20% gain for Palo Alto in 2023 is worth more than $1 billion or about half of Zscalers' entire year, and cash flow is robust.

Blue-chip Palo Alto has solid quarter, raises guidance

Palo Alto had a smash quarter with revenue, margin, earnings, and guidance ahead of prior guidance and the analysts' consensus targets. The company reported $1.9 billion in quarterly revenue for a gain of 21.8% over last year to outpace the consensus by 320 basis points. Gains were made in product and subscriptions with strength in core, next-gen, and platform offerings. The sole weakness is the billings, which are up but short of expectations. 

The company’s chief financial officer highlighted other, more significant, details in the report. Despite the shortfall in billings, the RPO grew by 22%, suggesting that sequential strength will continue into Q4 at least. Other metrics highlighted by the CFO include record Q1 margin and record cash flow; GAAP net earnings are more than double YOY, while adjusted net income is up 75%, and the guidance is also good. On the bottom line, the $1.38 in adjusted EPS is up from last year’s $0.83 and beat consensus by 1800 bps 

Palo Alto Networks FQ2 and FY 2024 revenue targets are slightly below the consensus expectations, but margin strength offsets the marginal weakness. The company expects Q2 and FY EPS to be well above the Marketbeat.com consensus target, and the guidance may be cautious. Among the causes for weaker-than-expected billings is the cost of money or interest rates; with the FOMC expected to start cutting rates in 2024, the business could accelerate before the fiscal year's end and also aid PANW margin. 

High valuation leads to an entry point for Palo Alto Networks

Palo Alto Networks trades at a high multiple, about 46X this year’s earnings consensus, presenting a near-term hurdle for the market. The 46X earnings multiple prices in significant growth over the next few years, and clouds are forming in the outlook. The takeaway for investors is that analysts like this stock and are driving it higher in 2023, a trend that should persist into 2024 and beyond. 

The 40 analysts with current ratings have the stock pegged at Moderate Buy, with a price target trending higher and offering a 15% upside relative to the post-release price action. Wedbush’s Dan Ives, who reiterated an Outperform rating and above-consensus price target days before the release, cited strong deal activity driven by digitization driving business for the foreseeable future. 

The technical outlook: Palo Alto Networks pulls back to the buy-zone

The price action in PANW shares fell about 8% in early trading after the Q1 release, but the move may already be over. The price action is finding some support at the critical $230-$235 level, which has been a floor in the market since early this year. Assuming the market continues to support the stock at this level, it should move sideways within its consolidation range over the next quarter. If not, shares of PANW could fall below $135. In this scenario, the firmer support of the 150-day EMA may produce the expected rebound.