Palo Alto Networks Stock Just Pulled Back—Is This a Prime Buy Zone?

PANW -1.17%

Key Points

• Palo Alto Networks had a solid quarter in FQ1; the price pullback is a buying opportunity. 

• A new acquisition raises questions, but will ultimately lead to growth, improved cash flow, and enhanced balance sheet strength.

• Analysts are raising their price targets and pointing to a new all-time high. 

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Palo Alto Networks (NASDAQ: PANW) created a buying opportunity for investors with its fiscal Q1 (calendar Q3) results. The results included outperformance and improved guidance, along with plans for an acquisition. The acquisition of Chronosphere is to blame for the stock’s precipitous 7% price plunge, a move that set the stage for the opportunity. While the pricey acquisition is questionable, the move aligns with Palo Alto’s platformization process, expanding it into a data services company, which is critical in the age of AI. The takeaway is that Palo Alto Networks can offer a unified data visibility and security platform, expanding its addressable market and opening doors to cross-selling and services penetration.

The analysts’ response to the news does not match the initial market action, highlighting the opportunity. MarketBeat tracked six revisions within the first 18 hours of the release, including reaffirmed Buy ratings and increased price targets. Wedbush analyst Dan Ives describes the platformization process as the right move for this company and views the Chronosphere purchases as setting up the next growth phase. The net result is that the consensus price target, which forecasts a 20% upside following the release, is trending higher and forecasts a new all-time high. Based on the prior stock price action, PANW’s post-release pullback stock could bottom quickly and rebound to new highs before the year’s end.

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Palo Alto Networks Outperforms in Q1, Raises Guidance

Palo Alto Networks had a solid quarter in Q1 with revenue of $2.47 billion, growing by 16% year-over-year. The strength was driven by Next Gen security services, which grew by 29%, underpinning results across all metrics. Segmentally, the smaller Product segment grew by 22.7% while the Subscription and Support segment grew by a smaller but more impactful 14.3%. Internally, RPO, a forward-looking metric, was also strong at 24%.

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Margin news is also favorable to the stock price outlook. The company’s adjusted net margin widened significantly due to revenue leverage and operational efficiency, rising 21% compared to the smaller topline gain of 16%. The only bad news is that revenue growth is expected to slow in the upcoming quarters.

Palo Alto’s Q1 strengths led it to raise its guidance, but not enough to outpace the consensus. The takeaway is that the bullish report was only in alignment with market expectations, providing no reason to rally, and the Chronosphere acquisition was more than enough excuse to sell.

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Palo Alto Networks’ Balance Sheet Proves It’s Doing Something Right

Palo Alto Networks’ Q1 balance sheet highlights prove that it is doing something right. The company’s cash is up, assets are flat, liabilities are falling, and equity is rising.

Equity increased by 10%, leaving leverage incredibly low with total liabilities less than 1x equity.

This is a fortress-like situation that allows for acquisitions without incurring debt.

The Chronosphere purchase is worth $3.35 billion in cash and stock, compared to over $3 billion on PANW's balance sheet and its positive cash flow business.

The likely outcome is that the cash balance will decline in the upcoming quarters, but will be offset by property and intangible assets, as well as improved cash flow.

Palo Alto Networks Pulls Back Into a Buying Opportunity

Palo Alto Networks’ stock price pulled back following the Q1 release and could continue falling through year’s end, but is unlikely to do so. The move is a knee-jerk reaction likely followed by a quick rebound, a buying opportunity within an uptrend and a bull market. Not only do analysts support this stock, but institutional trends suggest they will take advantage of the price decline. The only question is how deep the pullback may reach and how quickly the rebound will form. Based on recent pullbacks, the November decline may end as quickly as it began.

The article "Palo Alto Networks Stock Just Pulled Back—Is This a Prime Buy Zone?" was originally published by MarketBeat.