Update: Palo Alto Networks Inc (NYSE:PANW) up 10% after-hours on Q3 earnings beat. Earnings of 61 cents per share up 45% year-over-year, top expectations of 55 cents. Revenues up 25% to $431.8 million to beat estimates of $412 million.
Palo Alto Networks Inc (NYSE:PANW) is a relative laggard of late in the high-flying cybersecurity space. But ahead of Palo Alto’s first-quarter earnings report due out after Wednesday’s bell, that has PANW stock looking like a potential value in the space.
Look up the term “momentum stock,” and you’ll likely find several high-flying cybersecurity names like Symantec Corporation (NASDAQ:SYMC) and Fortinet, Inc. (NASDAQ:FTNT) that are trading at 52-week highs. These performances have sent the PureFunds ISE Cyber Security ETF (NYSEARCA:HACK) to 52-week highs of its own.
It’d be better if it weren’t for PANW.
Although anti-hacking specialist is broadly considered as having best-of-class anti-threat technology, PANW stock is trading about 30% below its 52-week high, making it a strong relative value among cybersecurity companies.
The Santa Clara, Calif.-based tech company is set to report third quarter earnings results Wednesday after the closing bell. The company hopes to turn around its sharp fall following Q2 earnings, which spooked investors with weak sales growth.
It certainly hasn’t helped that in March, CEO Mark McLaughlin warned about the company’s struggles to close large security deals, which led to lower revenue than Wall Street expected. But McLaughlin and his team weren’t doubting their capabilities to overcome those challenges. To fight off threats from the likes of Barracuda Networks, Inc. (NYSE:CUDA) and larger rival Cisco Systems, Inc. (NASDAQ:CSCO), among others, Palo Alto has since upped its marketing approach.
Plus, amid recent concerns about the WannaCry ransomware and other cyber threats causing companies and governments to rethink their threat-prevention strategies, PANW — despite issuing weak Q2 guidance — is poised to outperform. If not with this quarter’s results, certainly with its outlook for the rest of the year.
So with PANW stock down more than 6% for the year-to-date and 12% in the past six months, now’s the time to bet on the company’s potential turnaround.
Expectations for the Quarter
For the quarter that ended April, Palo Alto is expected to post an 31% year-over-year increase in earnings per share of 55 cents, while revenue of $412 million calls for 19% increase. For the full year, ending July, earnings of $2.48 per share implies a 48.5% year-over-year increase on revenue of $1.72 billion, up 24.6% year over year.
Obviously, those aren’t the numbers Palo Alto is accustomed to putting up.
Two years ago, for instance, revenue was growing at 50%, while EPS were climbing at almost 100%. And the rate of decline coincided with the recent decline in PANW shares. But given the rate at which cyber threats continue to climb, it would be a mistake to count this company out.
Businesses are embracing digital trends each year. And not only will demand for cybersecurity continue to climb, but as cyber thieves get more sophisticated, business leaders will need new and innovative approaches to combat threats. Palo Alto’s proprietary next-generation technology, which can detect and prevent threats gives its an advantage.
To that end, I expect PANW to not only top Wall Street estimates Wednesday, but also raise its full-year guidance, especially with rival FireEye Inc (NASDAQ:FEYE) and Symantec having just announced better-then-expected operating results.
All told, Palo Alto’s innovative edge and next-generation platform will remain in high demand, buoyed by increasing needs for more advanced layers of cyber threat detection and prevention.
Bottom Line for PANW Stock
With Palo Alto’s revenue still growing at close to 20% and profits growing at a faster rate, shares — currently at $117 — should begin to climb toward their consensus analyst price target of $145, delivering roughly 25% gains.
To the extent Palo Alto can sufficiently demonstrate it has overcome its product-development challenges and is able to close large deals, PANW stock should reach a new 52-week high by the end of the year.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
