Bernstein: Palo Alto Networks Inc Has EXPLOSIVE Upside Potential

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Palo Alto Networks Inc (PANW) stock could be back on the road to $200, according to a Thursday note from Bernstein’s Pierre Ferragu, Matthew Morrison and Rolf Bulk.

PANW Stock Has EXPLOSIVE Upside PotentialWhile $200/share isn’t unprecedented — PANW shares hit an all-time high of $200.55 last summer — it would still represent a substantive rally of 23% from Wednesday’s closing price of $161.99

The $200 price target comes just nine days after Goldman Sachs initiated coverage of PANW stock with a buy rating and a $191 price target.

While price targets are great, investors will be able to gain much more insight into Palo Alto’s business next week when it hosts an investor day on Monday. The event will go for four hours, between 1 p.m. and 5 p.m. PST.

Investor Day Insights for PANW Stock?

Bernstein’s Ferragu thinks that investors will have two main takeaways from the meeting. Number one:

” … operating margins should naturally move towards free cashflow margins, irrespective of any active contribution from management.”

Ferragu goes on:

“Palo Alto currently delivers free cash flow margin of 40%-plus and operating margin of ~13%, with free cashflow typically equal to four times its net income. Palo Alto operates a ‘hybrid revenue model’ in which they bill for their services at the beginning of the engagement and collect the cash shortly after. Therefore, operating margin acts as a lagged indicator for the profitability of the business.”

The second conclusion?

“…operating expenses should decline as a proportion of revenue as operating leverage kicks in, in line with technology software companies of a similar size.”

As for how that would happen:

“Running a simple benchmarking exercise shows that Palo Alto is operating far above peers in terms of operating expenditure. Operating expenses are currently at ~65% of revenues at Palo Alto, compared to ~49% for the broader software technology peer group (including Check Point). We expect Palo Alto to move more in line with peers, as the significant amount of operating leverage kicks in.”

Looking a little further down the road, Bernstein sees a few encouraging metrics for PANW stock going forward. Specifically, the research firm sees Palo Alto getting to 30% operating margins and above by 2019.

More importantly, Bernstein believes PANW can double its revenue and triple its cash flow in just three years. Those are some incredible growth rates that are rare in any industry.

Ferragu concludes by highlighting some truly impressive bottom-line metrics:

“As the most successful new entrant in the market, Palo Alto owns only ~7% of the firewall installed base but captures ~16% of revenues …and ~43% of incremental revenues.”

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/03/palo-alto-networks-panw-stock/.

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