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Nicholas Kitonyi
Nicholas Kitonyi
Articles (363)  | Author's Website |

Is Palo Alto's Recent Drop an Opportunity to Buy?

Company looks set to ride on the expected industry growth

October 26, 2016 | About:

What exactly makes Palo Alto Networks (NYSE:PANW) an interesting venture?

Data security is one of the biggest quandaries for companies—now that this is the information age. The internet makes it pretty simple to share information with colleagues with ease and speed. However, this simplicity of information sharing also comes with its cost and risks.

Currently, one of the most prevalent data security threats is the ransomware Zepto File Virus, which is spread via a spam email sent to unsuspecting recipients. Generally, the perpetrators ask for ransom in exchange for not selling your personal data or stealing files from your computer.

Data security companies rely on the vulnerability of businesses and individuals to make money. As the cases of data security theft, malware and spyware programs, and other related phishing software continue to rise, so does the income potential for cybersecurity companies that provide sophisticated products to combat such malicious infringements.

This is what makes the idea of investing in cyber security stocks an interesting one. In other words, you have to count on criminals to do their part in order to improve your return on investment. The cyber security industry has been experiencing a slowdown over the past few quarters, with several stocks dropping by as much as 30% in the last twelve months.

Palo Alto Networks is one of the biggest players in the market, and it too has not been spared by the recent wave that sank its rivals. However, Palo Alto Networks’ investors are loyalists, and they have a good reason to be. While the company’s shares appear to have lost momentum after falling 5.7% since the turn of the month, it does not look as though the stock could be in any danger of a massive sell-off as the situation would presuppose.

The company’s continued expansion program has seen its expenses continue to hamper the bottom line as the expected impact on the top line remains further down the horizon.

Palo Alto Networks’ recent slump could yet be a source of good news for the bulls looking to add the stock to their portfolio. For a company whose share prices had been on the rise, the recent drop presents a significant opportunity for bullish investors to buy.

Palo Alto Networks released its quarterly earnings report on Aug. 30. The report highlighted some notable gains in earnings per share, which were in line with the Zacks consensus estimate of 50 cents. At 50 cents per share, the company’s earnings surged 41.2% compared to earnings from the same quarter last year.

The company also reported $400.80 million in revenues, which surpassed the consensus estimate by $11.1 million. The improvement in revenues was primarily backed by the burgeoning network security market as well as a strong product line. Palo Alto Networks has added about 3,000 new customers into its ever-growing pool and currently has about 34,000 customers across the globe.

In light of the above, Palo Alto’s increasing expenditure has considerably undermined the company’s bottom line. This is well reflected in the $45.4 million operating loss reported last quarter under GAAP. However, the company has continued to shine under non-GAAP basis as it continues to see a considerable increase in income year-over-year. The company’s net income was $46.2 million compared with $25 million reported at the same time a year ago.

Palo Alto Networks expects revenues for the first quarter of fiscal 2017 to be in the region of $396 million to $402 million, which will be up 33% to 35% growth year-over-year. Research group Zacks pegged Palo Alto Networks’ revenues estimate at $398 million for the same period. Further, Palo Alto expects non-GAAP earnings per share to be between 51 cents and 53 cents, while excluding stock-based compensations. Therefore, the company’s non-GAAP earnings per share are expected to be in the range of $2.75 to $2.80 for the year 2017 fiscal.

The company’s stock has an average "buy" rating, and this was even before the recent slip-up. Out of the 42 equities research analysts covering Palo Alto, seven rated the company with a “hold” rating, 34 recommended for a “buy” with one tipping the stock for a “strong buy”.

Conclusion

In summary, Palo Alto Networks’ share price is set for a rebound and bullish investors will look at the stock’s current run as a slight slip rather than a flat-faced fall. Therefore, it could the perfect opportunity to go all in and buy before the small window shuts.

Nonetheless, given the recent insider activity, it might not yet be the time to go running for the hills.

Disclosure: I have no position in any stock mentioned in this article.

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About the author:

Nicholas Kitonyi
Nicholas is the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on several research sites.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website


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