Palo Alto Networks' Growth Story Looks Secure

At first glance, shares of cybersecurity leader Palo Alto Networks look overly expensive, but based on its performance and outlook, they have further to climb.
By Richard Saintvilus ,

Preventing cybercriminals and hackers from stealing sensitive data has been a profitable business for Palo Alto Networks (PANW) - Get Report , which reports first-quarter fiscal 2016 results after the closing bell Monday. And although its shares aren't cheap today compared to the rest of the market, the Santa Clara, Calif.-based software giant, which is quickly gobbling up market share in the fast-growing cybersecurity market, is projected to outgrow its peers in the quarters and years ahead.

So despite a worse-than-expected earnings report last month from cybersecurity specialist Barracuda Networks (CUDA) , which sent its stock plummeting 35%, investors looking for value and safety should hold onto their PANW stock -- it's one of the safest and smartest ways to play the cybersecurity market.

Palo Alto shares have surged 190% and 200% over the past five years and three years, respectively, crushing the S&P 500 (SPX) index during both spans. And, with its stock up some 33% in 2015, Palo Alto has outperformed the iShares North American Tech-Software ETF (IGV) - Get Report , which is up 14% on the year. Accordingly, valuation concerns have crept in.

With its share price around $166, PANW is trading at 94 times fiscal 2016 consensus estimates of $1.71 a share. That means its forward P/E is 5.5 times the forward P/E of 17 for the S&P 500. So, no question -- Palo Alto stock is pricey. But it would seem, based on analysts' rising EPS estimates, that the company's business outlook is getting better, making its stock -- expensive or not -- an investment to hold for the long term.

Consider: Since the start of the quarter, the consensus earnings per share estimate for both the just-ended quarter and the full year ending in July 2016 have climbed 3% and 6%, respectively. Further, during that span, EPS estimates for fiscal 2017 have climbed 7% (17 cents) to $2.62 a share.

Assuming Palo Alto does earn $1.71 for fiscal 2016, that would be year-over-year EPS growth of almost 100%. And if both sets of estimates prove out, to reach that $2.62 a share figure, the company would have to grow EPS in fiscal 2017 at around 53%. By contrast, competitors such asCheck Point Software (CHKP) - Get Report and Fortinet (FTNT) - Get Report are projected to grow 2016 earnings at rates of 10% and 35%, respectively.

In short, combined with Palo Alto's projected five-year average annual earnings growth rate of 42%, PANW stock still looks like something of a bargain among its peers, despite its seemingly lofty P/E ratio. This may help to explain why the stock not only has a consensus buy rating, but an average 12-month price target of $200, around 20% above current levels.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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