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TheStreet Open House

Palo Alto Networks' Slide Should Fuel Merger Interest

NEW YORK ( TheStreet) -- If there were any questions as to whether or not Wall Street's honeymoon phase with enterprise security darling Palo Alto Networks (PANW - Get Report) was over, the stock's 15% decline following what was on balance a decent third-quarter earnings report should have erased these doubts.

While Palo Alto has indeed pioneered what I believe is next-generation security, there was always concern about the company's long-term profitability. Management's downbeat guidance didn't help matters.

Nevertheless, the company has one of the most innovative security platforms on the market, with a pristine balance sheet. With the stock down 35% from its all-time high and with no bottom yet in sight, Palo Alto should begin to attract plenty of attention from names including Cisco (CSCO) or other established tech companies looking for top-line growth. In that department, very few can compare to Palo Alto.

Although the stock's performance since the announcement doesn't reflect it, Palo Alto's earnings report was actually pretty good. Investors chose to focus on the bottom-line miss while discounting the fact that revenue soared 54% year over year and 5% sequentially. This performance follows a second-quarter report where revenue surged 70%.

Granted, profitability wasn't overwhelming. The company reversed a profit last year by posting a loss of 10 cents per share on a GAAP basis, which spooked the weak hands. But the company managed to beat adjusted earnings per share of 6 cents by 1 cent.


We have to keep things in perspective here. It's not as if the entire sector has been knocking the cover off the ball. Palo Alto is still outperforming more dominant players like Fortinet (FTNT) and Check Point (CHKP). Even Cisco, which is regarded as the leader in the sector, posted 5% revenue growth, while also issuing downbeat guidance.

In that regard, it would be foolish for Palo Alto to guide against the grain in a market that has yet to show meaningful signs of a rebound in tech spending. To that end, although both the top- and bottom-line outlook fell short of Street estimates, I think management's guidance was in line with overall sector.

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