Palo Alto Stock Looks Like a Good Bet Heading Into Earnings

Multiple data points indicate that IT security company Palo Alto (NYSE:PANW) will report stronger-than-expected fiscal fourth-quarter results on Aug. 24, making PANW stock worth buying ahead of the company’s earnings.

Palo Alto Networks (PANW) logo on corporate building
Source: Sundry Photography /

More specifically, two of the company’s peers recently reported stronger-than-expected earnings, while one research firm issued a positive note on the IT security sector and another predicted that Palo Alto’s Q4 results would beat average estimates.

Finally, the work-from-home trend should continue to boost Palo Alto’s results going forward.

Peers Reported Strong Results

On July 29, Palo Alto’s IT security peer, FireEye (NASDAQ:FEYE), reported stronger-than-expected Q2 results and provided Q3 guidance that also beat analysts’ average estimates. Further, the company’s annual recurring revenue, or ARR, rose 8% year-over-year and reached a record $598 million, while its “cloud subscription and managed services ARR rose 27%, to $302 million, according to Seeking Alpha.

Further, FireEye raised its 2020 revenue guidance to a range of $905 million to $925 million from a range of $880 million to $900 million. It provided full-year earnings per share outlook to 22 cents to 26 cents, versus analysts’ average outlook of 5 cents.

On July 22, Check Point (NASDAQ:CHKP) reported Q2 EPS of $1.58, versus analysts’ average estimate of $1.43. The company’s Q2 top line was $505 million, versus the average outlook of $488 million.

Check Point and FireEye indicated that hacking threats had increased during the pandemic. In its Q2 earnings news  release, Check Point noted that “75% of the surveyed professionals fear further increase in cyberattacks and exploits as they start to re-open offices, while also maintaining mass remote working.”

Research Firms Are Upbeat

Among increased cybersecurity threats during the pandemic, companies appear to be spending more on IT security. A “survey of chief information security officers” by research firm Needham found that companies are poised to increase their spending on IT security.

In July, the firm predicted that spending on securing remote workers will drop in the second half of the year, but it’s upbeat on the outlook for endpoint protection and vulnerability management products. Palo Alto offers endpoint protection and vulnerability management systems.

The firm did, however, warn that Palo Alto could be hurt by “an increasingly saturated firewall market.” However, since Palo Alto has been moving away from firewalls and towards cloud security, I think the positive catalysts of increased cybersecurity attacks and the work-from-home trend will have a much greater impact on Palo Alto’s results than the saturation of the firewall market.

Another research firm, BTIG, on Aug. 5 upgraded PANW stock to “buy” from “neutral,” citing positive channel checks. BTIG said that the execution of Palo Alto’s firewall unit had improved. It also reported that demand for Palo Alto’s products was “solid,” and it expects the company’s Q4 results to come in above analysts’ average estimates.

Importantly, despite the strong results of Palo Alto’s peers and the upbeat notes issued by Needham and BTIG, analysts’ average EPS estimate for Palo Alto hasn’t changed over the last 60 days. As a result, I’m very optimistic about the company’s ability to beat analysts’ average estimate. Such a beat would likely propel PANW stock higher.

The Bottom Line on PANW Stock

Given Palo Alto’s multiple, strong, positive catalysts, the stock is trading at a reasonable forward price-earnings ratio of 46. CrowdStrike (NASDAQ:CRWD), which I’ve called overvalued, is trading at 38.5x its trailing sales.

Moreover, as a stock that can benefit from the work-from-home trend, Palo Alto is likely to remain fairly resilient even if the pandemic intensifies in the fall. As a result, I believe that longer-term investors should feel comfortable buying the shares at this point.

Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful, contrarian picks have been Roku, solar stocks and Snap. Larry began writing columns for InvestorPlace in 2015. You can reach him on StockTwits at @larryramer. As of this writing, Larry Ramer did not own any of the aforementioned stocks.

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