Palo Alto Beats After Shaking out Investors

Stock (Symbol)

Palo Alto Networks (PANW)

Stock Price

$139

Sector

Technology

Data is as of

July 11, 2017

Expected to Report

Aug 28

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. Source: Thomson Financial

Sharek’s Take

On February 28th, Palo Alto Networks (PANW) reported 2016Q4 earnings. PANW slashed guidance and the stock got hammered — from around $155 to $115. I bought PANW in December 2015 at $193 when it was growing profits 100% and had a P/E of 100. Palo Alto was a provider of cyber security products, and the time had what I researched as the best solutions on the market. So being down 40% with profit warning, sitting on a stock with a still-high P/E of 45, I sold the stock. THEN a global cyber attack in May causes people to invest in cyber security and PANW ends up beating the street (2017 Q1) with 45% profit growth — then ups profit estimates. Stock shoots from $116 to $133 in a day. NOW the stock “fits the mold” and is expected to have 34% profit growth the next 4 qtrs (on avg). So do I buy back in? Now? Well that’s asking the guy who guessed wrong last qtr. With a P/E of 45 this stock still has a premium price, and I personally believe if you’re gonna pay a high multiple for a stock it should have good certainty. PANW does not. So this stock stays on the radar, and if the stock market corrects perhaps I can buy at a discount from here. Overall though, the stock is in a LONG DOWNTREND that dates back to November 2015 (see the ten-year chart) but the numbers are good enough to turn a bad stock good.

One Year Chart

Crazy looking one-year chart. Stock climbs its way up, then smashes investors. That’s not nice, and when a girl dates a boy who is not nice it’s often best to walk away. BUT profit growth is around 50% right now, and business is good. Profits are expected to grow 58%, 24%, 24% and 31% the next 4 qtrs. The P/E of 42 is reasonable for this type of growth.

Fair Value

My Fair Value is 40x earnings, which is what it was last qtr. But with PANW’s fiscal year-end being July 31st, I’m looking ahead to 2018 earnings est. (of $3.27) to calculate my Fair Value, which is $131.

Bottom Line

Palo Alto Networks has taken its investors on a wild ride this year. But an uptick in demand caused by cyber attacks has propped the stock back up. Still, PANW is clearly in a downtrend, and with a P/E of 45 you’re paying a lot for the stock. But if PANW can beat the street it could deliver 40% profit growth over the next year. I sold the stock last qtr at a lower price, and I don’t feel good getting right back in now. Palo Alto Networks is on my radar.