Palo Alto Networks Showing Some Chinks in the Armor

Stock (Symbol)

Palo Alto Networks (PANW)

Stock Price

$155

Sector

Technology

Data is as of

March 17, 2016

Expected to Report

May 26

Company Description

PANW security platform consists of three elements: its Next-Generation Firewall, its Advanced Endpoint Protection, and its Threat Intelligence Cloud. The Company’s Next-Generation Firewall delivers application, user, and content visibility and control, as well as protection against network-based cyber threats integrated within the firewall through its hardware and software architecture. Its Advanced Endpoint Protection prevents cyber-attacks that aim to exploit software vulnerabilities on a range of fixed and virtual endpoints and servers. The Company’s Threat Intelligence Cloud provides central intelligence capabilities, security for software as a service (SaaS) applications, and automated delivery of preventative measures against cyber-attacks. The Company’s PAN-OS operating system contains App-ID, User-ID, site-to-site virtual private network (VPN), remote access secure sockets layer (SSL) VPN, and Quality-of-Service (QoS). Source: Thomson Financial

Sharek’s Take

In prior qtrs Palo Alto Networks (PANW) had perfect fundamentals. In regards to my research, this means (1) profit growth of 20% or more, (2) beating the street, (3) increasing profit estimates (qtrly and annual). Cream of the crop stocks also produce (4) triple-digit qtrly profit growth and (5) record profit each and every qtr (no seasonal drops). Everything green has to be green on my spreadsheets other than the P/E which is likely high when these other attributes are true. Last qtr PANW had (1) greater than 20% profit growth, (2) beat the street by a penny, (4) produced triple-digit profit growth and (5) recorded a record $0.40 profit, 5 cents higher than the record $0.35 set the qtr prior. But the chink in the armor was management (3) lowered qtrly profit estimates from the street est of $0.45 to $0.41-$0.42. Now management did state revenue would come in above estimates, so they may be lowering the profit bar to beat it later, but this still that makes this stock imperfect. Palo Alto is the top cyber security company in the industry, with superior technology and 30,000 customers — it’s added 1000 customers per qtr for 17 qtrs. PANW is doing great, with 63% booking growth last qtr while taking deals from Cisco, McAfee and Checkpoint. But without a serious security breach in the news to spur demand I’m lowering my Fair Value from 100x profits to 80x. At $155 this stock is stuck in the middle of my 2016 & 2017 Fair Values of $133 and $205.

One Year Chart

Since July 2015 high P/E stocks have had tough sledding as investors have gone for value stocks. But growth has recently come back into favor, and you can see this on the one-year chart as PANW has snapped back from its deep decline. Last qtr PANW had 111% profit growth on 54% sales growth. Estimates for the next 2 qtrs are: 78%, 79%, and 54%. Solid, but down from 96%, 111% and 63%. 2016 profit estimates dropped from $1.77 to $1.66. On the bright side the Est LTG of 46% is perhaps the highest of any stock I cover. But the P/E of 93 is high.

Fair Value

So we are stuck in the middle with this stock. It’s overvalued now but undervalued when we look a year out.

Bottom Line

Palo Alto Networks is the cream-of-the-crop cyber security company. The company has sterling fundamentals but a high valuation. The stock is selling above my 2016 Fair Value but below 2017’s — it’s stuck in the middle. I’m guessing the stock will go up if the market continues to rally but go down if the market goes into a correction. PANW ranks 13th of 33 stocks in the Growth Portfolio Power Rankings and 14th of 16 stocks in the Aggressive Growth Portfolio Power Rankings.