Growing cyber security threats have come as a boon for technology companies that address this market segment. Palo Alto Networks (PANW, Financial) is one such company that provides enterprise security platform to enterprises, service providers and government entities worldwide. On June 5, the cyber security stocks -- Palo Alto Networks, CyberArk Software (CYBR, Financial), FireEye (FEYE, Financial), Fortinet (FTNT, Financial) – started rallying sharply, after the news that nearly every government agency’s personnel data has been hacked.
Palo Alto investors are sitting on year to date gains of over 48%, and the stock is trading well above its 50- and 100-day SMA, signifying bullish trend. The stock has hit a new 52-week high in 2015, and one wonders if the momentum can be sustained. Let’s take a look.
Third-quarter in focus
Palo Alto posted third-quarter fiscal 2015 results with year-over-year sales growth of 55.4% to $234.2 million and beat Street’s expectations by around $13 million. The robust growth in top-line was on the back of strong portfolio of products, recurring subscription and support, besides new customer wins. The cyber security company exited the quarter with 24,000 customers in its kitty.
Driven by the growth in data center products, the Products segment revenue grew 44.5% year over year to $121.5 million. On the other hand, SaaS-based subscription revenue witnessed a whopping 71% on a year over year leading to 69.2% increase in service revenues. The performance of the company was also robust in all geographies, with North America, EMEA and APAC revenues increasing by 60%, 42% and 55% year-over-year, respectively.
Net income came in at $0.23 per diluted share versus $0.11 per diluted share in the year-ago quarter.
The company’s balance sheet remains healthy with total cash of around $822 million versus debt of around $482 million.
Global security market potential
According to a report published by MarketsandMarkets, the global cyber security market is poised to grow to a staggering $ 170.21 billion by the year 2020. Among all security services, managed security service is rapidly gaining traction by covering 40% of the security market in 2015. According to the report:
“Major driving factors for the Cyber Security Market are increasing strictness of government regulations and evolving cyber threats, which are forcing organizations to focus more on cyber security. Also, increasing mobile data usage, cloud usage, and digitization contribute to increasing cyber security awareness. Increasing scope of BOYD at workplace is also said to be driving the market on long-term basis.”
Also, one point to note is that the cyber security companies are witnessing double-digit growth in an environment where the overall IT spending is anticipated to grow just under 3% in 2015, according to the research firm Gartner.
So, the market potential is huge, and there’s urgency among companies to secure their IT infrastructure, and Palo Alto keeps growing as a result of this.
Near-term outlook
For the fourth-quarter fiscal 2015, the company expects revenue in the range of $252 million to $256 million, representing year-over-year growth of 41% to 44%. The consensus estimate is pegged at $222 million. Earnings are expected to be in the range of $0.24 to $0.25 per share versus the consensus estimate of $0.19 per share.
Analysts are also optimistic about the company. For example, Deutsche Bank has a $200 price target, but the consensus target is set at $181.20. Also, the massive EPS upgrade trends also reflects the confidence that analysts have on this company’s performance:
| EPS Revisions | Current Qtr. Jul 15 | Next Qtr. Oct 15 | Current Year Jul 15 | Next Year Jul 16 |
| Up Last 7 Days | 0 | 0 | 0 | 0 |
| Up Last 30 Days | 18 | 12 | 31 | 25 |
| Down Last 30 Days | 0 | 0 | 0 | 0 |
| Down Last 90 Days | N/A | N/A | N/A | N/A |
Final take
Palo Alto is growing a good clip, and the stock has been a momentum trader’s delight over the past one year. The global cyber security market is poised to grow at a rapid clip and even in muted IT investing environment; enterprises are willing spending on securing their IT infrastructure. Also, Palo Alto has been named the leader for the fourth time in a row in “Magic Quadrant for Enterprise Network Firewalls” by research firm Gartner.
The company has been winning major deals across the globe, and the strength of its platform will help sustain the growth momentum. Also, the company is continually innovating and improving as evidenced by the introduction of the PA-3060 and PA-7050 for the data center, enhancements to WildFire, and the addition of Traps, etc.
Hence, despite the sharp rally, Palo Alto remains a good stock to own for long-term gains.
