Why Palo Alto Networks Investors Are Feeling More Secure

NEW YORK (TheStreet) -- With a trailing price-to-earnings ratio of negative 103, according to Nasdaq.com, the big question regarding Palo Alto Networks (PANW) has always been if it can ever grow into its valuation.

Growth has never been an issue for Palo Alto, which sells firewalls that prevent data breaches and block malware and viruses from corporate networks -- a very hot issue nowadays. 

The stock has been hot, too. Investors sent the stock soaring Thursday to a new all-time high of $102.45, up almost 4%. The stock, which closed at $100, is now up almost 75% on the year to date.

Investors want to know if it's time to secure some profits. Maybe not. With reported revenue growth that's still accelerating at a high rate, in the next 12 to 18 months these shares can still reach $120 or a 21% premium from current levels.

With data breaches hurting retail giants Target (TGT) and most recently Home Depot (HD) , corporate information is under attack. Rivals like Cisco (CSCO) , which just picked off anti-hacking software giant SourceFire (FIRE) , is aware the growth opportunity. Cisco isn't just going to just roll over and cede the market.

Still, despite the emergence of others like Fortinet (FTNT) and Check Point Software (CHKP) , which are both trading at near 52-week highs, Palo Alto's management assured its shareholders their faith in the eight-year-old enterprise security company was well placed. By delivering fourth-quarter results that showed sustained accelerated growth and providing even better outlook, Palo Alto made good on its promise.

While Palo Alto, based on its P/E, does offer above-average risk, not many companies are growing revenue at 59% rate, either. This is an impressive 51% acceleration from the year-ago quarter. What's more, there doesn't appear to be any weak spots in this business.

Palo Alto's growth is driven by both service and product revenue, which grew at a year-over-year rate of 67% and 52%, respectively. That's still impressive, even for a relatively young company. In that regard, strong growth should be the expectation. After all, that's what investors are paying for. But what is not expected, however, is how efficiently Palo Alto continues to operate.

Along with its 59% revenue growth, Palo Alto is also delivering close to 73% in gross margin. Not only is this 21% higher than the industry average, according to Yahoo! Finance, that's also 24 points and 10 points higher than Cisco and Juniper (JNPR) , respectively.

This made Palo Alto's operating net loss of $32.1 million (on a GAAP basis) easier to stomach. This was due, in part, by a jump in operating expenses that outpaced revenue. Nevertheless, on non-GAAP basis the company's 11 cents per share earned was in line with expectations, besting last year's mark by 4 cents.

As noted, management's rosier-than-expected guidance was enough to send the stock to new highs. First-quarter revenue is expected to come in between $178 million and $182 million, representing growth of as high as 42% year over year. The low end of that range is still 2.3% higher than what analysts were projecting.

All told, with the company's continued solid performance, it would be foolish to sell these shares. With cyber attacks now constantly on the minds of corporate executives, Palo Alto's next-generation security technology will remain in high demand. So will the stock.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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


TheStreet Ratings team rates PALO ALTO NETWORKS INC as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:

"We rate PALO ALTO NETWORKS INC (PANW) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and feeble growth in the company's earnings per share." You can view the full analysis from the report here: PANW Ratings Report

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