I am a big fan of cloud security leader Palo Alto Networks (NASDAQ:PANW) stock.
Palo Alto offers talent at the bleeding edge of cloud security including a next-generation firewall for both hardware and software. I like the company’s CEO Nikesh Arora, too.
Palo Also doesn’t just protect your network edge. It also provides the equivalent of doors and windows inside the network and offers security as a service.
These are vital niches, but you don’t buy PANW stock on fundamentals. PANW is exclusively a growth stock. Revenue grew 28%, year over year, during the most recent quarter and management forecasts that trend will continue.
Sustaining growth in the face of increased threats costs money, and PANW reported gross profit of $860 million in the most recent quarter, 70% of total revenue.
It’s worth noting that there was a $119 million net loss under Generally Accepted Accounting Principles (GAAP) as research and marketing expenses each rose $100 million.
Growth and PANW Stock
The market reaction was to see the growth and ignore the loss. Shares shot up 20% in a day and are still rising. PANW stock should open today at a little more than $461 with a market cap of more than $44 billion. That’s for a company that may do $4 billion in sales this year.
Growth stocks are like that. Investors will pay 10 times revenue for fast, dependable growth. When the growth slows, they’ll get out. Growth has a magic all its own.
After every jump, and after every quarter, you see the same stories. Is it too late to buy? In cybersecurity that answer is almost always no. Never underestimate the power of fear to play into greed.
Before the latest earnings, there were doubters. Analysts expected less revenue. The big jump in the PANW stock price was a way of playing catch-up, but there was another reason to like the earnings, as our William White explained.
Under non-GAAP measures, Palo Alto reported a fat profit of $1.60 per share, not a loss. The difference was the acquisition of Bridgecrew, announced in February, for $156 million in cash.
During the quarter Palo Alto was paying for things like the cash settlement of equity awards, leases and other contracts associated with the Bridgecrew deal. Those were one-time costs.
The Power of 5G
The rise of 5G wireless networking, bringing wider swaths of frequency into the wireless mainstream, is also behind the rise of PANW stock.
Our Joanna Makris highlighted this in InvestorPlace’s “If you only buy one stock” series. PANW stock was at about $360 at the time. It trades today at something closer to $460.
Corporate networks aren’t ready for the explosion in wireless use that 5G makes possible.
This is especially true for those in security, but Palo Alto’s technology is ready. Makris believed, early this year, that Palo Alto was being underestimated. She was right.
The Bottom Line
I almost never recommend stocks selling at 10 times revenue. You don’t have to pay that much.
I don’t do charting, but tech stocks do pull back, most recently in March and early August. Palo Alto stock will fall, and someone will call it overvalued, for whatever reasons. That’s the moment to buy. Where that is in dollars I can’t say. I’m guessing, down 10% from the next high?
There are exceptional needs in computer security and network security. Palo Alto has the best answers for them. It also has the market cap needed to buy what it doesn’t have, as in the case of Bridgecrew, and a CEO who knows when to strike.
I’m not alone. Of 25 analysts at Tipranks 23 are screaming buy, even though their price target is just 5% ahead of where it trades now.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
