Palo Alto Networks Inc: Is PANW Stock Set for Big Upside?

PANW StockBack in the spring and summer, Palo Alto Networks Inc (NYSE:PANW) stock was stumbling, and industry experts were concerned that the Santa Clara, California-based cybersecurity provider was at the start of a long rough patch.

But now in autumn, PANW stock appears to have regained both its footing and its respect. How long can this positive vibe continue, or will a new round of issues bedevil the stock?

Stalled Momentum for PANW Stock

Part of the Palo Alto Networks stock’s recent woes could be traced to its May 26 announcement of its third-quarter fiscal 2016 earnings report. Total revenue for the fiscal third-quarter 2016 grew 48 percent year-over-year to a record $345.8 million, compared with total revenue of $234.2 million for the fiscal third-quarter 2015.

But the generally accepted accounting principles (GAAP) net loss for the fiscal third quarter 2016 was $70.2 million, or $0.80 per diluted share, compared with GAAP net loss of $45.9 million, or $0.56 per diluted share, for the fiscal third quarter 2015.

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The news was not welcomed by financial analysts. Within three weeks of the unsatisfactory third-quarter announcement, PANW stock lost approximately 10% of its value. But that might have just exacerbated existing fissures: on a year-over-year measurement, it lost over 25%. (Source: “Why is Palo Alto Networks (PANW) Stock Losing Momentum?” Zacks, June 14, 2016.)

But by the time the fourth-quarter fiscal 2016 earnings were reported, Palo Alto Networks stock seemed to have achieved a turnaround. Total revenue grew 41% year-over-year, reaching a record $400.8 million, compared with total revenue of $283.9 million for the fiscal fourth-quarter 2015. Its GAAP net loss for the fiscal fourth-quarter 2016 was $54.5 million, or $0.61 per diluted share, compared with a GAAP net loss of $46.0 million, or $0.55 per diluted share, one year earlier.

For the total fiscal year 2016, the company’s total revenue grew 49% to $1.4 billion, compared with $928.1 million in fiscal year 2015. Palo Alto Networks stock’s GAAP net loss was $225.9 million, or $2.59 per diluted share, in fiscal year 2016, compared with a GAAP net loss of $165.0 million, or $2.02 per diluted share, in fiscal year 2015.

However, CEO Mark McLaughlin’s year-over-year sales projection of 33% to 35% was greeted by many industry experts with apprehension that lethargic sales growth and increased losses were on the horizon. (Source: “Are Palo Alto Networks’ Growth Days Over? (PANW),” Investopedia, September 8, 2016.)

Although the company’s desultory results were blamed on higher operating costs, part of the problem was attributed to a shrinking market on IT spending. At the time of the earnings report, Gartner Inc (NYSE:IT) was predicting that global IT expenditures would only register an anemic 0.6% increase for 2016. Coupled with a still-crowded field of cybersecurity companies that could not be easily elbowed away, the company might seem to have a rough near-term future. (Source: Zacks, op cit.)

PANW Stock Get a Thumbs Up

Despite these problems, Palo Alto Networks is showing no signs of throwing in the towel, nor is it expressing regret for disappointments in its recent earnings reports. Rene Bonvanie, Palo Alto’s chief marketing officer, told a September technology conference hosted by investment bank Dougherty & Company LLC that the company was less interested in product lines to build rapid revenue streams, instead favoring the creation and introduction of technologies or teams to build the company’s existing platform.

Dougherty analyst Catharine Trebnick noted that while Palo Alto Networks’ “VM-Series” of virtual firewalls only have 1,700 customers, the company’s total customer base number is 34,000. Half of the 1,700 were new buyers, which Trebnick predicted “could act as a ‘foot in the door’ to a longer-term expansion strategy.” (Source: “Palo Alto Thinks It Can Grow Just Fine Without Acquisitions,” SDX Central, October 4, 2016.)

Trebnick added that the company prefers a more holistic growth pattern that can be achieved, and it has chosen to “enter accounts through one use case” before expanding into other use cases. (Source: Ibid.)

While not everyone puts merit in this strategy—Vetr Inc. downgraded PANW stock from a “strong buy” to a less muscular “buy”—there are more than a few supporters of Palo Alto Networks.

Among the more prominent equities analysts, Nomura reissued a “buy” rating, and more “buy” opinions were stated by the likes of Barclays PLC, Maxim Group, LLC, and Goldman Sachs Group Inc (NYSE:GS). As of October 5, 36 analysts gave PANW a “buy” rating while eight opted for “hold.” (Source: “Palo Alto Networks Inc. (PANW) Stock Rating Lowered by Vetr Inc.,” Community Financial News, October 5, 2016.)

Plus, major investors have sought out generous purchases of PANW stock. Jennison Associates LLC  grew its holdings by 32.3% in the second quarter, while AllianceBernstein Holding LP (NYSE:AB) upped its stake by 122.1%, and Criterion Capital Management, LLC expanded its shares by 374.5%. PANW stock is now 80.06% owned by institutional investors. (Source: Community Financial News, op cit.)

The Takeaway Regarding PANW Stock

Palo Alto Networks stock has yet to wear out its welcome with the financial world, despite a less-than-stellar recent track record. One might excuse its shortcomings on the new attention that has been put on hacking, ranging from governments having their secrets exposed to celebrities having their private naughty pictures distributed. And the long-haul strategy is certainly appealing; few tech companies that try to rush into new areas achieve satisfying results.

While PANW stock shows recent evidence of weakening around the edges, it would appear that its core is still strong. If anything, it deserves attention as the cybersecurity realm becomes more complex and challenging.