While semiconductor stocks are all the rage on Wall Street right now, the cybersecurity sector has become just as hot. Sure, hacking protection isn’t as sexy as new Radeon graphics processors, but it is just as profitable. Just ask Palo Alto Networks (NYSE:PANW).
Since the beginning of the year, PANW stock has rallied nearly 60%. Palo Alto Networks shares have powered higher and taken out several key technical resistance indicators. PANW stock now rests just shy of all-time high territory.
PANW stock is currently looking to consolidate its recent leg higher above support at $230. This recent up-leg comes as PANW breaks out of a trading range between support at $200 and resistance near $220.
Technical traders may show some concern for PANW stock, as its relative-strength index (RSI) is on the verge of moving into overbought territory above 70. However, PANW has shown it can push well into overbought territory, with the right motivation.
This is where Palo Alto’s earnings come in. The company steps into the earnings limelight next week on Thursday. Palo Alto has bested Wall Street’s expectations in each of the past four quarters by an average 9.75-cents-per-share — outperformance that has helped power PANW stock higher this year.
This time around, analysts are expecting a profit of $1.17-per-share from Palo Alto, an increase of 27% over the year prior. Revenue is expected to rise 24% year-over-year to roughly $633 million.
That said, Palo Alto bulls have their sights set a bit higher given the company’s strong performance so far this year. According to EarningsWhispers.com, the whisper number comes in at $1.22-per-share — a target that is easily within range of Palo Alto stock’s average beat over the past year.
Additional bullish sentiment can be found among analyst ratings. According to Thomson/First Call, 23 of the 41 analysts following PANW stock rate the shares a “buy” or better. The 12-month consensus is $229.63, leaving plenty of room for target increases following another earnings beat.
Options traders are not as bullish, however. The Sept put/call open interest ratio currently rests at 0.89, meaning that puts are nearly as popular as calls on PANW stock heading into earnings. Most of these put contracts appear to be protective rather than outright bearish bets, however, residing at deep out of the money strikes like the $200 and $185 strikes.
Overall, September implieds are pricing in a potential post-earnings move of about 8.5% for PANW stock. This places the upper bound just shy of $250, while the lower bound lies at $210.
Two Trades for PANW Stock
Call Spread: PANW has been an excellent momentum play this year. Earnings have played a big role in that momentum. Barring any weakness in guidance, PANW stock should continue to the upside following earnings before entering another consolidation period.
Traders looking to take advantage of this upside might want to consider a Sept $240/$245 bull call spread. At last check, this spread was offered at $2.08, or $208-per-pair-of-contracts. Breakeven lies at $248.08, while a maximum profit of $2.92, or $292-per-pair-of-contracts, is possible if PANW stock closes at or above $245 when September options expire.
Puts Sell: For a more neutral play on PANW stock ahead of earnings, traders might want to take advantage of technical support in the $200 region. As such, a Sept $200 put sell position is an excellent option.
At last check, this put was bid at $1.15, or $115-per-contract. If PANW trades above $200 through September expiration, traders entering this position will retain the premium received for opening the position. However, if PANW stock trades below $200 ahead of expiration, then traders may be assigned 100 shares at a price of $200-per-share for every contract sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.