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Palo Alto Networks: Headwinds Arise despite Recent Gains

Like many other pandemic-era winners, Palo Alto Networks (PANW) has continued to perform well operationally.

Booming demand for cloud-based security is likely to carry on in the next few years. With this, it’s not at high risk of missing the mark when it comes to its future quarterly results.

That said, there’s one factor it may have a tough time overcoming. That would be growing reluctance to pay up for growth. As you likely know, monetary policy is tightening. Interest rates are more likely than not moving higher next year.

Despite projections of 20-25% revenue and earnings growth, it’ll be difficult for Palo Alto, trading for 67.1x analyst consensus of this year’s earnings, to hold steady at today’s prices. With this, I am bearish on the stock at present levels. (See Palo Alto stock charts on TipRanks)

Why PANW Stock Gained Last Month

In a month where tech stocks (as measured by the Nasdaq Composite) saw a sharp decline (5.6%), how did Palo Alto Networks shares manage to close the month in the green?

PANW stock was likely able to post a low single-digit percentage gain for the month due to the bullishness generated from its analyst day on September 13.

In its presentation, management discussed how it was able to exceed growth targets for Fiscal 2022 (year ending July 2022), which it set at its 2019 analyst day. It also made the argument why a continued shift to a cloud-based, more remote working environment point to it continuing to knock things out of the park in the coming years.

Because of this, investors ignored the month’s rising uncertainty over the future direction of tech growth stocks. Instead, they bid it up to a new all-time high.

What’s Next

Compared to similar cybersecurity names, like CrowdStrike (CRWD) and Fortinet (FTNT), PANW stock may look a lot more reasonably priced. In the months ahead though, it may be difficult for it to maintain its current valuation.

If recent trends (rising bond yields) continue, and the Federal Reserve moves along with its monetary tightening plans? The days of Palo Alto being able to trade for a forward P/E well north of 50 may be numbered.

Admittedly, this doesn’t necessarily mean a big drop in price lies ahead. With the top end of analyst estimates calling for it to earn $11.43 per share in FY23 (ending July 2023), shares may only see a minor pullback if tech valuations overall compress.

The problem? “Losing less” isn’t exactly an appealing proposition.

Wall Street’s Take

According to TipRanks, PANW stock has a consensus rating of Strong Buy. Out of 27 analyst ratings, 24 rate it a Buy and three rate it a Hold.

The average Palo Alto price target is $531.67 per share, implying 13.4% upside potential. Analyst price targets range from a low of $420 per share, to a high of $615 per share.

Bottom Line

The verdict for Palo Alto is much the same as it is for many of its peers. Great business, solid growth, but the price just isn’t right.

This valuation caveat may not have mattered from spring of 2020 until now, as “growth at any price” was the winning way to invest.

However, the runaway bull market seems to be near its end.

Disclosure: At the time of publication, Thomas Niel did not have a position in any of the securities mentioned in this article.

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