Palo Alto’s Numbers Point Up But the Stock Points Down

Stock (Symbol)

Palo Alto Networks (PANW)

Stock Price

$127

Sector

Technology

Data is as of

July 14, 2016

Expected to Report

Aug 30

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

Palo Alto lags behind Cisco in the Enterprise Security market, but is growing at a much faster rate, thus I feel its the best — and only — cyber-secutiry stock to own. Last qtr Palo Alto conintued its rapid growth as profits jumped 83% on a 48% increase in sales. Billings grew a robust 61% and subscription revenue was up 69% year-over-year, compared to 57%, 50% and 47% the prior qtrs. The cyber-security market could grow 15% this year, but this sector has been selling off as there hasn’t been many newsworthy cyber-attacks. I’ve been with high-flyers before when the stock was down as well. The lesson I learned was to stick it out and stay with the stock as stocks sometimes trends go to extremes. PANW was overvalued last year and now it’s undervalued. The only issue I have now is the company lowered last qtr’s profit estimates 4 cents then beat by just a penny. PANW used to up by a penny or two, then beat by 3 cents. This stock used to sell for 100x earnings last year and now sells for just 48x. I took a half-position around $200 and want to double-up. But the trend is our friend and Palo Alto’s trend is currently down, and the sector is weak. Thus for a confirmation rally of some sort where the stock breaks out (on earnings?) would be perfect. You’ll pay a little more but at least the stock would then be trending higher.

One Year Chart

Solid fundamentals but one little issue is profit growth just slipped from a triple-digit rate to a double-digit one. 83% profit growth is still great, but that’s still slowing. Add in the fact the company lowered estimates only to beat by a penny means maybe business is slowing. I’m probably nit-picking too much. PANW has an exceptional Est. LTG of 41% and analysts Estimate qtrly profits will grow 75%, 60%, 60% and 57% the next 4 qtrs. Another negative is 2016 profit estimates didn’t increase this qtr. Perhaps the macro environment is weak?

Fair Value

My Fair Value on this stock is 75x earnings, which gives significant upside to the stock. So much upside that we can own some here and wait for the stock to head higher before doubling up.

Bottom Line

Palo Alto Networks is in my eyes the best — and only — cyber security stock to own. PANW’s fallen to a point the P/E’s gone from 100 to 48. This looks to be a great time for long-term investors to take a look. But on the other hand the stock is still in a downtrend and since the trend is your friend I’m going to wait until the stock pops higher on solid volume before I double-up. PANW ranks 21st of 38 stocks in the Growth Portfolio Power Rankings.