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How Has Palo Alto Networks Stock Performed since Start of May?

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Jun. 6 2019, Updated 1:58 p.m. ET

Stock returns

Several cybersecurity stocks have been serious wealth creators for investors. Stocks in this segment have increased revenue at a robust rate over the years due to an increase in demand for cybersecurity solutions. A rise in cyber attacks has driven this demand as enterprises continue to be vulnerable to them.

Here, we’ll look at the returns of cyber companies since May 2019, which was a volatile month for broader markets. Palo Alto Networks (PANW) has dropped 20.0% since the start of May 2019. In the first four months of 2019, PANW stock gained an impressive 32.0% and is now up by just 5.8% year-to-date. In comparison, the Cyber Security ETF (HACK) has generated returns of 13.6% in 2019. Last month, we identified PANW stock as overvalued.

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So what has driven PANW’s stock price lower?

Palo Alto Networks announced its third-quarter results (year ending in July) last week and reported sales of $726.60 million with adjusted EPS of $1.31. Analysts expected the company to post sales of $704.05 million with earnings of $1.25. So why did the stock fall despite this earnings beat?

PANW’s billings in the third quarter rose 13.0% year-over-year to $821.9 million and was below Wall Street estimates of $872.6 million. PANW is now shifting towards an annual subscription model and away from its three-year contract model that impacted billings.

Further, the escalation of the trade war is expected to impact the company’s earnings negatively by $0.02 in the fourth quarter. PANW also announced two acquisitions that will drive the bottom line lower in the near term. PANW announced the acquisition of Twistlock for $410 million and PureSec in an undisclosed deal. Now, PANW has estimated fourth-quarter earnings between $1.41 to $1.42, which is way below Wall Street estimates of $1.55.

Does the pullback provide a buying opportunity for investors?

PANW is trading at a forward PE ratio of 31.0x. In comparison, its earnings are estimated to rise over 35.0% this year. Its earnings are also expected to rise at a CAGR (compound annual growth rate) of 27.0% over the next five years, while sales might rise over 21.0% in the next three years. PANW stock looks undervalued considering the PE multiple.

Out of the 41 analysts tracking PANW, 29 recommend a “buy,” ten recommend a “hold,” and two recommend a “sell.” The analysts have an average target price of $279.91, which indicates that the stock has an upside potential of 40.5% from current levels.

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