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Why Is Palo Alto Networks Stock Rising Today?

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On September 4, cybersecurity company Palo Alto Networks (PANW) reported its fourth-quarter and fiscal 2019 financial results. The company reported Q4 revenues of $805.8 million, a YoY (year-over-year) rise of 22%. This was higher than the consensus estimate by $2.24 million.

PANW also reported non-GAAP EPS (earnings per share) of $1.47, a YoY rise of 9.7%. This is higher than the consensus estimate by $0.05. The company’s GAAP EPS of -$0.22, however, missed the consensus estimate by $0.22.

According to Palo Alto Networks’ fourth-quarter earnings press release, billings represent an important metric for the company, including product revenues and subscription and support revenues. In the fourth quarter, the company reported total billings of $1.06 billion, a YoY rise of 22.5%.

In fiscal 2019, Palo Alto Networks reported revenues of $2.90 billion, a YoY rise of 27.5%. The company reported non-GAAP EPS of $5.45, a YoY rise of 29.8%. The company also reported total billings of $3.49 billion in fiscal 2019, a YoY rise of 22.2%.

Yesterday, Palo Alto Network stock closed at $200.49, 0.68% higher than its previous closing price. The company’s stock is currently trading at $214.95, 7.11% higher than the previous closing price. To learn more about the company’s performance in yesterday’s after-market trading session, please read Why Is PANW Stock Gaining in After-Hours Trading?

Analysts’ recommendations for Palo Alto Networks

The 37 analysts tracking Palo Alto Networks have an average target price of $264.18 on its stock. This indicates a potential upside of 22.1% in the next 12 months based on the current trading price.

Today, BMO Capital Markets and Maxim Group reiterated their “outperform” ratings and set a target price of $245 for the stock. Maxim Group also reiterated its “buy” rating and raised its target price from $304 to $316. On August 20, Bank of America/Merill Lynch reiterated its “buy” rating and raised its target price from $275 to $307.

Market opportunity

According to IndustryARC, the global cybersecurity market was worth $140 billion–$150 billion in 2018. The market is expected to grow at a CAGR (compound average growth rate) of 8% from 2019 to 2025.

According to Palo Alto Networks’ fourth-quarter earnings presentation, the cloud security market is expected to grow at a CAGR of 21.2% from 2018 to 2022. According to Goldman Sachs Global Investment Research, the public cloud disruption opportunity could exceed $850 billion in 2022 and about $1 trillion in 2023. Plus, Palo Alto Networks expects the cloud security market to grow in line with the overall public cloud market.

In its fourth-quarter earnings presentation, the company has estimated the TAM (target addressable market) in enterprise and cloud to be worth $72.6 billion in 2022. This is significantly higher than the company’s TAM of $19.1 billion in 2017.

Palo Alto Networks expects its network security TAM and automation opportunity TAM to be worth $26.5 billion and $14.1 billion, respectively, in 2022. Palo Alto Networks estimated its cloud security TAM and automation opportunity TAM to be worth $7.8 billion and $4.1 billion, respectively, in 2022.

By 2022, Palo Alto Networks expects its endpoint protection, analytics, and automation TAM to be worth $13.1 billion. It expects its automation opportunity TAM to be worth $7.0 billion in 2022.

Market growth rates

Palo Alto Networks forecast a 9.2% CAGR for its overall TAM from 2018 to 2022. The company expects its cloud security TAM and network security TAM to grow respective CAGRs of 21.2% and 6.9% from 2018 to 2022.

The company expects its endpoint protection, analytics, and automation TAM and its Future Security Automation TAM to grow CAGRs of 10.2% and 8.4%, respectively, from 2018 to 2022.

Long-term revenue and billing targets

In its fourth-quarter earnings presentation, Palo Alto Networks guided for fiscal 2020 revenues of $3.4 billion–$3.5 billion and fiscal 2022 revenues of $5.0 billion. This implies a CAGR of 20% from fiscal 2019 to fiscal 2022.

Plus, the company guided for total billings of $4.1 billion–$4.2 billion in fiscal 2020 and around $6.0 billion in fiscal 2022. This implies a CAGR of 20% from fiscal 2019 to fiscal 2022.

According to its fourth-quarter earnings presentation, Palo Alto Networks has focused on positioning the firewall as a platform to integrate and simplify security. The company’s next-generation firewalls offer customers subscriptions for features such as threat prevention, URL filtering, Global–Protect, WildFire, and DNS Security.

The company plans to integrate IoT (Internet-of-Things) security in its firewall platform from 2020 to 2022. Notably, Palo Alto Networks expects its firewall platform billings to rise at CAGR of 23% from 2019 to 2022. This is lower than its CAGR of 27% reported from 2017 to 2019.

Palo Alto Networks’ next-generation security business, comprising its Prisma and Cortex platforms, reported billings of $452 million in fiscal 2019. This accounted for 13% of the company’s total billings.

The company expects next-generation security billings to be worth $800 million–$810 million in fiscal 2020 and $1.75 billion in fiscal 2022. As a result, this implies a CAGR of 57% from fiscal 2019 to fiscal 2022.

The company expects its next-generation security business billings to be around 30% of the company’s billings in fiscal 2022. Plus, PANW guided for next-generation security business revenues of $1.0 billion in fiscal 2022.

Margin and cash flow targets

In its fourth-quarter earnings presentation, Palo Alto Networks set the target for a long-term operating margin of more than 25%. The company has guided for an investment of $100 million–$125 million in its next-generation security business in fiscal 2020. Subsequently, the company expects to report operating margin leverage of 150 basis points each in fiscal 2021 and fiscal 2022.

In fiscal 2019, Palo Alto Networks reported adjusted FCF (free cash flow) of $1.06 billion. The company expects to generate adjusted FCF of around $4.0 billion by fiscal 2022. Plus, the company also set a long-term FCF margin target of more than 30%.

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