Palo Alto Networks Tops Q2 Earnings Estimates; Stock Has Over 30% Upside Potential

The Santa Clara, California-based cybersecurity company Palo Alto Networks reported better-than-expected revenue and profit in the fiscal second quarter, but shares slumped as earnings projections fell short of analysts’ expectations.

The global cybersecurity leader reported quarterly adjusted earnings of $1.55​​ per share for the quarter ended in January, beating the Wall Street consensus estimates of $1.43 per share. Similarly, the company’s revenue surged over 24% to $1.02 billion from a year earlier​, beating the market expectations of $985.68 million.

Palo Alto Networks’ 25% year-over-year revenue growth in the second quarter surpassed our expectations as sales pushed above the $1 billion thresholds for the first time. We believe investor concerns surrounding the firewall transition from hardware to software and Palo Alto’s ability to grow outside of the firewall can be pacified. The firewall business continues to generate abundant free cash flow, whether in physical or virtual forms, which is fueling the higher growing cloud and automation security solutions,” said Mark Cash, senior equity analyst at Morningstar.

“We are raising our fair value estimate to $400 from $345 per share, as we expect higher revenue growth and an improved margin profile emanating from next-generation security products over the longer term. Shares of this narrow-moat cybersecurity stalwart are slightly undervalued, in our view.”

For the fiscal third quarter 2021, Palo Alto Networks forecasts diluted non-GAAP net income per share in the range of $1.27 to $1.29 per share, which incorporates net expenses related to the proposed acquisition of Bridgecrew, using 100 million to 102 million shares. Total revenue in the range of $1.05 billion to $1.06 billion, representing year-over-year growth of between 21% and 22%.

However, that was lower than the analysts’ expectations of $1.29 per share on revenue of $1.05 billion for the third quarter.

Palo Alto Networks shares, which surged about 54% in 2020, rose over 8% so far this year. However, the stock fell 3.16% to $384.35 on Monday.

Executive Comments

“The SolarStorm attack highlighted enterprises need a comprehensive up-to-date map of their full IT infrastructure environment, including understanding their own networks as well as external attack surfaces and supply chains,” said Nikesh Arora, Palo Alto Networks chairman and chief executive, on the conference call.

“We expect that this attack will be a wakeup call to all enterprises to modernize cybersecurity and will serve as a net incremental tailwind, not just for us but also for the industry.”

Palo Alto Networks Stock Price Forecast

Twenty-two analysts who offered stock ratings for Palo Alto Networks in the last three months forecast the average price in 12 months of $417.68 with a high forecast of $515.00 and a low forecast of $305.00.

The average price target represents an 8.67% increase from the last price of $384.35. From those 22 analysts, 20 rated “Buy”, one rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $515 with a high of $655 under a bull scenario and $255 under the worst-case scenario. The firm gave an “Overweight” rating on the cybersecurity company’s stock.

Several other analysts have also updated their stock outlook. Piper Sandler raised the target price to $425 from $400. Palo Alto Networks had its price target raised by Royal Bank of Canada to $425 from $380. The firm currently has an outperform rating on the network technology company’s stock.

Moreover, Mizuho increased their price target to $450 from $360 and gave the company a buy rating. Northland Securities increased their price target to $410 from $350 and gave the company an outperform rating.

Analyst Comments

Palo Alto Networks offers a disruptive platform, well-positioned to address the evolving threat landscape. We believe Palo Alto Networks will continue to differentiate itself from its peers as it proves out a broader TAM around a NextGen Security Platform (and executing to that opportunity),” said Keith Weiss, equity analyst at Morgan Stanley.

“With the strong billings base and the continued drive towards higher operating margins, we remain confident in the durability of our FCF estimates. Currently trading at 22x CY22e FCF vs. our model which looks for 18% FCF CAGR from CY21-26e and terminal 23x CY26e FCF, we continue to see attractive risk/reward in PANW shares.”

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