Can Palo Alto Networks Grow Into its Valuation?

Its platform helps corporate clients secure their network while safely enabling them to manage the increasingly complex and rapidly growing number of applications running on their networks.

But competitors Cisco (CSCO), Dell's (DELL)SonicWall and CheckPoint (CHKP) don't intend to roll over and allow Palo Alto to disrupt the market forever.

What's more, with the company's market share registering at only 10%, it is the one with the pressure to grow. What steps will it take to increase its market share absent significantly reducing cost and possibly hurting its margins?

Bottom Line

As noted earlier, my concern is Palo Alto is a relatively young company that is experiencing an impressive spurt of growth. But can it be sustained to the extent that it deserves a forward P/E of close to 150? Will it be able to deliver the level of free cash flow growth that will keep investors interested over the next few years?

As great of a quarter as this was, I worry that Cisco and other players including F5 (FFIV) and Juniper (JNPR) will make certain that it is no cakewalk for Palo Alto. In response, its challenge will be to beat expectations while also raising outlook if it wants to continue its momentum in the stock.

Because as expensive as valuation appears currently, I don't see how else shares can rise absent these scenarios.

At the time of publication, the author held no position in any of the stocks mentioned.

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This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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