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A Look at Palo Alto Networks’ Stock Returns and Valuation

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Apr. 17 2019, Updated 11:00 a.m. ET

Stock returns

Cybersecurity stocks have generated impressive returns over the last few years. The Prime Cyber Security ETF (HACK) has gained 21% this year and 77% in the last three years. Similarly, other technology stocks have had a stellar run in 2019 after burning investor cash last year.

While the Technology Select Sector SPDR Fund (XLK) has gained 25% this year, the VanEck Vectors Semiconductor ETF (SMH) is up by 33%. However, are double-digit returns of several stocks a sign that the market is now overvalued? How many stocks that are supported by cheap valuations could jump higher in the next few months?

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Cybersecurity heavyweight Palo Alto Networks (PANW) has generated returns of 29% in the last 12 months. Since the start of 2019, the stock is up by 30%. The stock has gained 70% in the last three years and 257% in the last five years.

This growth was driven by the company’s rise in sales and earnings. Earnings per share rose at a compound annual growth rate of 71% in the last five years. Sales grew exponentially from $396 million in 2013 to $2.27 million in 2018 and is estimated to reach $4 billion by 2021.

PANW stock is currently trading 6% below its 52-week high of $260.63 and 53% above its 52-week low of $244.48. With an RSI (relative strength index) score of 56, PANW stock is trading closer to overbought territory.

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Is PANW stock overvalued?

PANW is still posting a GAAP (generally accepted accounting principles) loss and will be profitable only by 2020. It has a forward 2020 PE ratio of 342x. Analysts expect PANW’s sales to rise 26% in 2019 and 19% in 2020. Its EPS are expected to rise 37% in 2019 and by 17% in 2020.

Its EPS could grow at a compound annual growth rate of 27% over the next five years. The stock looks grossly overvalued. Investors are betting on the high growth prospects for cybersecurity stocks. Is PANW stock due for a correction after an upward spiral in 2019? Wall Street remains optimistic.

Analysts’ recommendations

Of the 41 analysts covering PANW, 29 have given it “buy” recommendations, ten have given it a “hold” recommendation, and two have given it a “sell” recommendation. The average 12-month target price for PANW is $279.57, which indicates a potential upside of 14% from its current level.

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