You would be hard-pressed to find a faster-growing industry today than cybersecurity, particularly as more and more consumer data goes online and into the cloud. And that strong outlook bodes well for cybersecurity specialist Palo Alto Networks (PANW). But the market is not yet pricing the stock on that assumption.
Palo Alto is set to report fourth quarter fiscal 2020 earnings results after the closing bell Monday.
To be sure, PANW stock, which has underperformed the market for most of the year, has gone on an impressive run, bouncing some 117% from its 52-week low. But “impressive” in this case is relative. While the stock trades near all-time highs, the year-to-date gain is just 17%, while the 6-month output stands at just 8%.
Those gains are nothing to complain about, to be sure. But relative to, say, competitors such as Crowdstrike (CRWD) and Zscaler (ZS), which has skyrocketed by 83% and 148%, respectively in six months, there’s a clear underperformance there. And that’s even though Palo Alto has delivered twelve straight top- and bottom-line beats and still possess arguably best-of-breed products and services compared to its competitors. What’s more, its billings revenue, which was once a concern, jumped 24% in Q3, while subscription and support revenue continue to rise.
All told, while there are still tons of reasons to be excited about the company's growth in the quarters ahead, particularly given the rapid shift towards the cloud and a renewed focus on artificial intelligence, the market will need a reminder of the company’s market position. Palo Alto needs to beat Street estimates, it also needs to remove any questions about the impact its new competitors have had on its growth trajectory. As such, the company’s guidance will determine whether Palo Alto can get investors (and analysts) excited about its business moving forward.
For the three months that ended July, Wall Street expects the California-based company to earn $1.39 per share on revenue of $923.24 million. This compares to the year-ago quarter when earnings came to $1.47 per share on revenue of $805.8 million. For the full year, earnings are projected to decline 12% year over year to $4.79 per share, while full-year revenue of $3.38 billion would rise 16.6.% year over year.
The projected full-year decline in EPS is one reason the stock has not accelerated to the upside in the same vigor as Crowdstrike and Zscaler. But Palo Alto’s 4Q results should nonetheless breeze past estimates owing to the large number of enterprise deals the company has won, including U.S. federal demand - a point made last week by Andrew Nowinski, analysts at D.A. Davidson who last week raised his price target on the stock to $310 from $290 and reiterated a Buy rating.
What’s more, there is also some evidence that Palo Alto’s business transition towards a recurring revenue has begun to work. In the third quarter, not only did the company’s revenues rose by 20%, Palo Alto added over 2,500 new customers. Just as impressive, the revenue it gets from its existing customers rose, indicating strength in the recurring model. And amid the coronavirus-driven remote working environment, which increases demand for security solutions, investors will want to see those metrics for Palo Alto improve tis quarter.