Stock Analysis & Ideas

Palo Alto’s Robust Financials Earn It a “Strong Buy” Rating

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Palo Alto’s most recent results comfortably beat analysts’ expectations, and the company provided upbeat guidance for its fiscal fourth quarter, reflecting strong growth and efficiency. In addition, Palo Alto said that it is immune to macroeconomic headwinds. These factors, along with a pullback in the stock, make PANW attractive.

Palo Alto Networks (PANW) reported robust fiscal third-quarter results in May that comfortably beat analysts’ expectations. Consequently, the stock rallied nearly 10% post-earnings after reporting strong year-over-year sales growth and upbeat guidance for its upcoming quarter. Hence, Palo Alto’s growth engine is still firing. Wall Street analysts are very bullish on the stock, giving it a Strong Buy consensus rating. We are bullish as well.

Despite the surge in its stock price following the report, Palo Alto is down substantially from its all-time high. As you read along, you’ll find out that the stock still has plenty of upside potential. Palo Alto’s balance of value and growth is an incredible recipe for success for long-term investors and makes it a stock worth considering.

Palo Alto Proves Its Naysayers Wrong With Its Solid Fundamentals

Palo Alto beat analysts’ expectations and generated about $1.4 billion in revenue in its third quarter. The company didn’t just surpass analyst expectations of $1.36 billion but reported revenue growth of 29% year-over-year, thanks to a 40% increase in billings.

Palo Alto’s CEO, Nikesh Arora, said that the solid top-line growth in the third quarter demonstrated the company’s efficiency and consistent execution in capitalizing on the secular tailwinds in the cybersecurity sector. He added that its strong portfolio has allowed the company to raise guidance across billings, revenue, and earnings per share for the year.

Palo Alto’s GAAP net loss for the third quarter was $73.2 million compared to the $145.1 million loss reported in the third quarter of 2021. Moreover, the company was successful in generating non-GAAP earnings per share of $1.79 vs. analysts’ expectations of $1.68.

Palo Alto’s Profitability is Improving

Palo Alto’s non-GAAP net income for the most recent quarter amounted to $193.1 million compared to $139.5 million generated in the same quarter last year. Hence, Palo Alto’s profitability metrics continue to impress and have effectively solidified its financial positioning.

Palo Alto’s raised guidance for its Fiscal fourth quarter calls for revenue to be in the range of $5.48 billion and $5.5 billion, representing year-over-year growth of almost 29%. Moreover, it also expects total billings to amount to $7.106-$7.136 billion, implying year-over-year growth of 30%+.

Palo Alto’s chief financial officer, Dipak Golechha, said, “Our drive to deliver strong total shareholder return in Q3 was headlined by our revenue growth, while we also balanced operating margin expansion and free cash flow conversion.”

Palo Alto Keeps on Growing

Palo Alto’s next-gen security (NGS), which includes Prisma and Cortex, has aggressively expanded, with almost $3 billion in acquisitions in the past couple of years. The expansion has helped it gain greater market share from its competition.

The company’s annual recurring revenue from NGS services increased 65% year-over-year to $1.6 billion. During the third quarter, Cortex and Prisma expanded their active customer bases by 64% and 23%, respectively.

The company aims to increase its earnings per share by about 42% in the fourth quarter. It also plans to end the year with an adjusted free cash flow margin between 32.5%-33% vs. the 32.6% margin in Fiscal 2021.

In its earnings presentation, PANW showed that its business is resistant to most macroeconomic headwinds. The company declared that issues like supply-chain disturbances, geopolitical conflicts, and cross-border cyberattacks have the potential to generate massive growth for the business.

Moreover, Palo Alto highlighted that the company is immune to inflation because companies are less likely to reduce their security spending just because their costs are crippling. These statements show that Palo Alto is confident in its business and more likely to dodge macroeconomic headwinds.

Wall Street’s Take on PANW Stock

Turning to Wall Street, PANW stock maintains a Strong Buy consensus rating. Out of 22 total analyst ratings, 21 Buys and one Hold were assigned over the past three months.

The average PANW stock price target is $630.73, implying 22.6% upside potential. Analyst price targets range from a low of $517 per share to a high of $823 per share.

Takeaway – PANW is a Stock for the Long Term

Palo Alto operates in a competitive industry; however, its strong fiscal Q3 results showed that the company still has plenty of fuel left in the tank. Its valuation seems more attractive compared to the past as it continues to improve its profitability.

Palo Alto’s guidance for the fourth quarter implies strong growth ahead, and long-term tailwinds make PANW a cybersecurity stock to consider for the long term.


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