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Palo Alto Networks Reported Strong Results, But Shares Look Stretched

PANW - Palo Alto Networks Reported Strong Results, But Shares Look Stretched

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Surprise! Cybersecurity giant Palo Alto Networks (NYSE:PANW) reported yet another double-beat-and-raise quarter, and, as a result, PANW is rallying.

I say “surprise” sarcastically here because Palo Alto Networks has now reported six double-beat-and-raise quarters in a row, a streak that dates back to May, 2017. During that stretch, PANW stock has nearly doubled.

That streak of double beats won’t end anytime soon, and as such, PANW stock should be able to head higher for the foreseeable future. But I’d also caution investors about the shares’ valuation. It finally appears as though the valuation of PANW is maxing out. While that won’t necessarily stop this stock from going higher as long as the company’s financials remain strong, it does create additional risks and will make it difficult for PANW to double again over the next six quarters.

Looking at the big picture, PANW stock is a long-term winner that should be held for a long time. But, in the near-term, the waters may be choppy, and investors may want to wait for a better opportunity to buy PANW.

PANW Reported Great Q4 Results

Palo Alto Networks’ Q4 numbers validate the long-term bull thesis on PANW stock. That long-term bull thesis is predicated on the idea that not only is PANW a big winner due to cybersecurity market tailwinds, but the company is actually dominating and growing share within that secular growth industry.

The Q4 numbers speak for themselves. The company’s revenues rose 29% year-over-year, and its billings also jumped 29% YOY. The whole cybersecurity market is believed to be expanding at a 12%-15% clip. Thus, Palo Alto is growing at essentially twice the pace of the entire cybersecurity industry, meaning that the company’s share of the cybersecurity market is increasing meaningfully.

The implication of this is that PANW’s products are better than those of its peers, and as cybersecurity becomes more and more important, enterprises are increasingly turning towards premium solutions. Consequently, PANW is both adding new customers and stealing customers away from its competitors. This dynamic should persist as long as the importance of cybersecurity continues to grow and Palo Alto Networks remains the sector’s biggest and best player.

Thus, over the next several years, PANW should continue to grow at a 20%-plus rate as the cybersecurity market expands at a 12%-15% clip. During that stretch, the company’s gross margins, which are currently struggling, should stabilize, and its operating expenses as a percent of revenue should continue to fall dramatically as its leverage increases. All together, the company’s earnings should easily increase 25%-plus over the next several years.

PANW Stock Is on Fire

In this bull market, investors have been salivating over growth. Palo Alto Networks has a lot of growth, both in previous quarters and looking forward. As a result, PANW has been a huge winner, nearly doubling over the past six quarters.

While I expect the numbers to continue to be good, and I believe that good numbers will keep pushing PANW stock higher in the long run, I also think investors should be a bit more cautious at these levels.

From a fundamental standpoint, it is pretty hard to justify a $230 price tag on PANW stock today. Even if you assume its earnings grow at a 25% clip over the next five years, that isn’t enough to justify a $230 price tag today. That growth rate would imply earnings per share in five years of roughly $12.20. At a forward price-earnings multiple of 25, which is average for companies that are growing quickly,  the four-year forward price target would be $305. Discounted back by 10% per year, that equates to a present value of under $210.

Thus, $230 seems to be a high price to pay for PANW from a fundamental perspective.

Plus, PANW stock is now trading about 20% above its 200-day moving average. While that isn’t terribly stretched, it is above normal for this growth stock. As such, the technicals appear slightly stretched here, too.

With the fundamentals and technicals stretched, I’m more cautious on PANW than I have been over the past several quarters. It may be a good time to take some profits. But any big dips in this stock should be viewed as long-term buying opportunities because PANW stock will inevitably head towards $300 over the next several years.

Bottom Line on PANW Stock

PANW’s strong Q4 numbers show that this stock is a long-term winner. But the fundamentals and technicals look stretched in the near-term, so this may be a good time to take some profits. Long-term investors should wait for a sizable dip before buying PANW.

As of this writing, Luke Lango did not hold any positions in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/09/palo-alto-networks-reported-strong-results-but-shares-look-stretched/.

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