Palo Alto Networks (NASDAQ:PANW) stock is up 4.4% for 2022, mainly thanks to a stellar earnings release. The company said it earned $185 million, $1.74 per fully diluted share, on revenue of $1.3 billion for the December quarter, the second of its 2022 fiscal year. Net income was up 20% over the previous year, and revenue was up over 30%.
With inflation, the tech wreck, and the Russian-Ukrainian crisis, it seems everything is down in 2022.
But computer security remains a good business. With fears growing of Russian cyberattacks, Palo Alto’s services may come in handy.
Protection Against Cyber Threat
Palo Alto’s next generation firewalls are the best protection a corporation can buy against these threats. The company has issued a special paper on specific threats posed by the war.
It should be noted here that cybersecurity is a hard business. The state of the art can change on a dime. It takes expensive programming talent to keep up with it. I’ve been saying here for two years that Palo Alto has both.
Good leadership is also vital. Palo Alto has it in Nikesh Arora, once the number two man at Softbank (OTCMKTS:SFTBY).
Palo Alto does have competition. One of its closest competitors is Crowdstrike Holdings (NASDAQ:CRWD), which I covered in November. Over the last two years Crowdstrike stock has outperformed that of Palo Alto but PANW stock has clawed back the lead over the last year.
Too Expensive?
Everything has its price. Even for the best goods, can get too expensive. That’s been Crowdstrike’s problem lately. Is it Palo Alto’s?
At $582/share, its opening price on March 3, Palo Alto has a market capitalization of $57.2 billion. If the first half’s growth continues through June, as it should, Palo Alto might get to $5.5 billion in revenue. It’s now trading for over 10 times price-to-sale. The company says its “current performance obligations,” the volume of business left under current contracts, is $6.3 billion.
The problem is costs, which can make profits only a sometime thing. Palo Alto has never shown positive net income over a full year. It does, however, have positive free cash flow, almost $1.4 billion worth in its 2021 fiscal year, and over $1 billion so far in 2022. Operating cash flow is also consistently positive. It can write a check for its long-term debt and still have $3 billion left over.
This gives Arora ammunition for acquisitions. His most recent was Bridgecrew, bought a year ago for about $200 million in cash, including performance bonuses. If the crew put that money into PANW stock, their stake would now be worth 65% more.
For these reasons, analysts aren’t sweating the losses. There are 20 analysts following PANW stock at Tipranks, and all but two say you should hold it. The danger signal is that their average price target is just 7.5% ahead of where it’s currently trading.
The Bottom Line
Palo Alto is growing at 30% per year, it’s cash flow positive, it has excellent leadership and leading edge products. It has the cash to buy new technologies, and its stock will be attractive in a deal as well.
But Palo Alto is fully valued.
That doesn’t mean it’s not worth owning. It’s just that, as analysts continue pounding the table for it, it’s no longer the best value on the board.
If you’re buying Palo Alto stock today, you’re playing cyber defense. That’s something we all need to do. The longer the war drags on, the more likely Palo Alto stock is to keep rising. But once peace breaks out, there will be shinier objects worth buying. Be ready for that.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this story. 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 Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.
