Cyber-security firm Palo Alto Networks Inc (NASDAQ: PANW ) made investors big money a few years ago, despite a lack of profits, but patience has been exhausted and the stock collapsed after yet another loss in the January quarter.
But hopes are high for the quarter ending in July, which will be reported after the market closes Aug. 31. The official earnings estimate is for earnings of 78 cents per share, about $71 million, but the whisper among analysts is it could come in at 80 cents, on revenue of $486 million. That revenue number, also, would be a huge gain from the $431 million of the last quarter.
Palo Alto sells what it calls a "next generation security platform," built around a Threat Intelligence Cloud that can deal with malware before it strikes a customer, as well as a "next generation firewall" that works inside a customer's network, not just at its edge.
Palo Alto Should Be a Winner
The promise of Palo Alto's claims gave the stock a high profile from its 2012 IPO, and despite losses of almost $400 million in 2014-2015, the stock's performance was amazing, rising from $57 per share to a high near $200.
Since then, however, it has been mostly downhill, and PANW stock opened for trading Aug. 30 at about $131 per share.
But good times may be here again, according to our Matt McCall, who predicts a big move in the stock after the earnings come out. The problem is that the company has disappointed for so long it's hard to see which way that move will run.
Most analysts, however, have yet to give up on the stock. About half of the 42 now following it have it on their buy lists, and only one is telling investors to sell it. If the company can beat the whisper number, even by a whisper, the stock is poised to take off.
Among the optimists is Piper Jaffray, which has a $146 price target on the stock. Most recent notes on the company are positive, with several investment houses taking new positions.
Catalysts Abound for PANW Stock
In addition to earnings, security breaches can be a catalyst for stocks like Palo Alto.
New products can also be a catalyst. PANW stock wisely used the currency of its high stock price to buy Cyvera , an Israeli company through which it delivered Traps, a system aimed at protecting network endpoints.
The problem is that there can be negative as well as positive catalysts, beyond earnings, the most important being growing competition. Both Cisco Systems, Inc. (NASDAQ: CSCO ) and Intel Corporation (NASDAQ: INTC ) have been emphasizing cybersecurity since Palo Alto's rise, and making acquisitions aimed at boxing smaller companies like PANW in.
Palo Alto has responded through improvements in its hardware , bringing its security into small branch offices that connect to the cloud. But the cloud, too, poses a challenge, as the big cloud players handle security in-house, and their growing dominance brings down the number of potential customers.
The Bottom Line
Palo Alto is like a baseball player with enormous home run potential who has been striking out a lot in the majors. You can talk about potential up to a point, but at some point, the player needs to hit the ball out of the park regularly, or the manager is going to turn to someone else.
To an extent, this has already happened with Palo Alto. Over the last year, PANW stock is down 8.8%. The question now is whether it has turned the corner for good, delivering real profits. If it hasn't, analysts will move on to some other prospect.
My own view is that even if it delivers, Palo Alto is surrounded by deep-pocketed competitors who will either buy it or watch it sink beneath the weight of their own development efforts.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romanceThe Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn . As of this writing he owned no shares in companies mentioned in this article.
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