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



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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