Palo Alto Networks (NASDAQ:PANW)had such a good quarter the results are lifting the entire cybersecurity industry. The problem for us is the results aren’t that strong, the growth is largely priced into the market, and trading at over 65X its earnings, it is one expensive stock to own. In light of the fact Palo Alto Networks doesn’t pay a dividend, this gives us no reason to want to own it. While the analysts still see upside potential in the name, we think any rebound that gets started now will be met by resistance well below the all-time high.
Wedbush analysts Dan Ives called the Q3 results a “blowout” but we disagree. The company beat the Marketbeat.com consensus by a very tepid $0.03 billion or about 220 basis points. In his view, "The shift to the cloud is a massive tailwind as the company is in the right spot at the right time to benefit from this multi-year tidal wave of cyber security enterprise spending, despite macro jitters right now clouding the Street's view of the stock/sector.”
33 analysis with current coverage rate the stock a firm Buy, but there isn't a lot of upside in our opinion. The Marketbeat.com consensus price target is $628.50 or about 31% above the current price action, but it has begun to trend lower. There’ve been at least eight commentaries out since the Q3 results were released, and only 2 boosted their price targets. The two that boosted the price targets raised theirs to a level below the consensus, while the remaining 6 include three restated price targets and three lower. The consensus of the post-release commentaries is below the broader consensus, and we think heading lower.
Palo Alto Networks Beats And Raises
Palo Alto Networks had a good quarter and may have been aided by the rising threat of Russian cyberattacks. The company reported $1.39 billion in revenue for a gain of 29.9% over last year. The growth is on top of last year’s 23% gain and is expected to continue into the end of the fiscal year. Billings, an indication of future revenue, grew by 40%, and the strength also carried through to the bottom line. On the bottom line, the adjusted EPS came in at $1.79 or up 30% from last year to beat the consensus by $0.11, and the guidance is just as strong.
Turning to the guidance, the company raised its full-year revenue guidance for the 3rd time this year to $1.53 to $1.55 billion. This is up 25% to 27% versus last year and compares well to the $1.53 billion consensus figure. The adjusted EPS is also expected to come in above the consensus, and there is some upside risk to the outlook. Once again, the stock is trading at over 65X its earnings; this guidance is priced into the market.
The Technical Outlook: Palo Alto Networks Puts In A Bottom
Price action in Palo Alto Networks surged higher in the wake of the Q3 results, and it looks like a bottom is in. The caveat is that price action remains low relative to the current trading range, and the rebound has been, so far, relatively weak. At best, we expect to see this stock move sideways within the established range of $450 to $630. At worst, Palo Alto Networks will fall back to the $450 level and break it after retesting resistance at or near the $450 level. In that scenario, the stock could move much lower than where it is now.
