Why Palo Alto Networks Is a Buy Ahead of Earnings

NEW YORK ( TheStreet) -- With Palo Alto Networks ( PANW) stock trading near its 52-week low, I'm trying to figure out where this company went wrong.

Although the company's initial public offering earlier this year did not come with as much fanfare as others in the social media realm, the company's arrival to the stock market brought with it high expectations. However, unlike other recent IPOs, Palo Alto has produced. But did it do enough?

In the company's first quarterly report as a public company, Palo Alto did what it had to do to affirm to investors that although the company is young, it can deliver the goods. For its fiscal fourth quarter, Palo Alto saw its revenue jump to $75.6 million representing an increase of 88% and topping the $40.2 million it reported in the same quarter of a year ago.

Its net loss for the quarter was $4.6 million on a GAAP basis, or 18 cents per share. This compares favorably to its net loss of $6 million in the same period of a year ago. Overall revenue for fiscal 2012 grew 115% to $255.1 million - exceeding its 2011 mark of $118.6 million.

Calling these numbers impressive would be an understatement. Not only did revenue soar almost 90% from the previous year, but it jumped 15% sequentially. In addition to billings, which rose by 57%, the company's product revenue grew by 70%, while revenue from services shot up a robust 135%. But that was only part of the good news.

Palo Alto is not all about numbers. The company has pioneered what is considered next-generation security along with a platform that is considered one of the most innovative in the industry. Its growth figures suggest that enterprise customers are willing to pay whatever the company is willing to charge.

Palo Alto has a platform that 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. Investors want to know how long this growth spurt will last before the company becomes an acquisition target. I think Cisco ( CSCO) will be calling soon.

However, in the meantime, Palo Alto will need to take more steps to increase its market share. To do that, the company must figure out ways to maintain revenue without significantly reducing costs and hurting margins. This is the only way for the stock to work in the long term and for the company to grow into its valuation, which, quite frankly, is still high. But we will see which direction it goes.

The company is expected to report fiscal first-quarter earnings on Thursday after the market close. The challenge will be to beat expectations while also raising its outlook if it wants to continue its momentum.

However, considering the tough macro-climate, which has resulted in very few beat-and-raise reports, it would be a surprise to see if Palo Alto can be one of the few to do it. I won't be holding my breath. Regardless, it would be very encouraging to see sustained revenue momentum coming in north of 30% year over year.

Will this be enough to excite a scared market? Nonetheless, the stock is worth a decent look at current levels. As I've said, it is not cheap by any means. But for long-term investors with a good appetite for risk, this is one that has the potential to pay off handsomely if a few things fall into place.

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

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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