Palo Alto Networks: Fierce Competition, Shares Remain Near Fair Value (NASDAQ:PANW)

Cybersecurity stocks took off to start 2024. The WisdomTree Cybersecurity Fund ETF (WCBR) continued its surge off lows notched in October last year, but the ETF has since pulled back considerably as we head into the quarterly reporting season for cybersecurity companies.

I reiterate a hold rating on Palo Alto Networks, Inc. (NASDAQ:PANW). I see the stock near fair value amid strong EPS growth, though I am a bit more sanguine on the tech stock’s chart which I will detail later in the article.

Cybersecurity Stocks Stumble After A Rough Earnings Season in February

Palo Alto Networks develops and sells network security solutions, ranging from solutions in appliance form factors to software and cloud-based solutions.

Back in February, Palo Alto reported a solid bottom-line beat. Q2 non-GAAP EPS of $1.46 topped the Wall Street consensus forecast of $1.30 while revenue of $2.0 billion grew 19% from year-ago levels, a modest beat. Shares fell big after the report, however, as the management team cut its full-year billing forecast and issued disappointing revenue guidance.

Within its Q3 report due out next month, it will be key to monitor how billing trends have progressed. The company was forced to discount heavily in the latest quarter amid intense competition. That pressure could persist as other players, like CrowdStrike Holdings, Inc. (CRWD), command a significant share of cybersecurity services worldwide. PANW’s posted solid Next Generation Security portfolio growth and robust ARR trends, but its core business and ability to grow margins through price increases is now in question.

Palo Alto sees billings for FY 2025 between $10.1 and $10.2 billion, down from the previous range of $10.7 to $10.8 billion. A weaker macro environment is a key risk as it could lead to more customer demands for lower-margin bundling of services and shorter deal duration – that could negatively impact free cash flow. Still, PANW remains a sell-side favorite in the AI space. Looking ahead, the options market has priced in a 7.6% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the May reporting date.

On valuation, analysts at BofA see earnings rising at a high 20%-plus pace this year with an EPS slowdown in the out year. Per-share profits are then expected to reaccelerate in 2026. The current consensus outlook, per Seeking Alpha, shows $5.52 of non-GAAP EPS this year, rising to above $7 by 2026. Top-line growth is also very strong – ranging from 14% to 18% annualized over the coming quarters. No dividends are expected to be paid on this high-growth firm, and its free cash flow is modest, but steady in the black.

Palo Alto Networks: Earnings, Valuation, Free Cash Flow Forecasts

If we assume a normalized EPS growth rate of 20% and apply the company’s 5-year average PEG ratio of 2.2, then an appropriate forward earnings multiple is about 44. Applying non-GAAP EPS of $5.90 over the coming 12 months, we arrive at an intrinsic value target of $260, putting shares slightly to the expensive side. But I’m also mindful of PANW’s 5-year average forward P/E that is 10 turns higher than my perhaps conservative 44 multiple.

PANW: A Deserved Premium Valuation, But Near Fair Value

Compared to its peers, PANW sports a valuation that is in line with high levels across the industry given gangbuster EPS growth trends. The company’s profitability trends are likewise very strong, on par with its competitors while EPS revisions are notably positive following the bottom-line beat from February (despite the sharply negative stock reaction). Finally, share-price momentum has taken a hit lately, but the stock appears to have found some support.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q3 2024 earnings date of Thursday, May 23. No other volatility catalysts are seen on the calendar.

Corporate Event Risk Calendar

The Technical Take

With shares not too far from fair value on this high-growth cybersecurity name, the momentum situation has turned mixed. Notice in the chart below that shares soared to a high of $380 in advance of Q2 2024 earnings, but then gapped down following the report’s issuance. PANW cratered to $260, finding support at its rising 200-day moving average. But the rebound rally stalled at its 50dma. Since late February, shares have consolidated, testing the 200dma on numerous occasions.

I’m encouraged by the RSI momentum oscillator at the top of the graph notching fresh two-month highs lately, but I would like to see PANW rally through the now-falling 50dma. There’s also key support in the $258 to $265 range – that was resistance on the way up during the second half of 2023 and has proven to be a buying spot since the middle of Q1 this year. So long as the stock holds that level, PANW appears fine technically.

Overall, PANW continues to hold important support, but a move under $255 would be bearish.

PANW: $260 Key Support, Shares Buffering the 200dma

The Bottom Line

I reiterate a hold rating on PANW. Shares have slightly underperformed the S&P 500 since October last year, but with a high EPS growth rate and a defined area of support on the chart, there are some reasons to like this high-multiple stock.