Palo Alto Networks Inc. (PANW, Financial) disappointed shareholders in 2016 as the stock was down approximately 29%. The stock displayed strong upside momentum in January, climbing more than 17%. It appears that upside momentum was temporary, however, as the stock is down nearly 7% year to date.
A couple of weeks ago, Palo Alto reported its second-quarter results. For the quarter, the cybersecurity company reported earnings per share of 63 cents, beating the estimates by one cent. Revenue came in at $422.6 million, missing the consensus by approximately $7 million.
That figure represents a surge of 26.3%, down considerably from 54% in the second quarter of fiscal 2016. After appreciating two years of escalating revenue over 50%, the company’s revenue growth has started slowing down.
The slowdown is primarily due to the company’s shifting focus from its product segment to subscription services. In its most recent quarter, the revenue generated from its subscription and support segment grew 54% to $253.8 million, while the revenue generated from the product segment was almost flat. The company retained over 90% subscription renewal rates.
On the other hand, the company added nearly 2,000 new subscribers and currenlty serves over 37,500 customers around the globe. Furthermore, it is highly likely the company will endure growing its subscriber base at a healthy rate due to its robust product portfolio.
Over the past several years, the cloud computing market has been growing at a quick rate, which reflects the strong demand for cloud security measures. As per alliedmarketresearch.com, the worldwide cloud security market is anticipated to reach almost $9 billion by 2020, which represents a compound annual growth rate (CAGR) of 23.5%.
Currently, Amazon (AMZN, Financial) holds the leading position in the cloud market on the back of its Amazon Web Services. In 2016, Palo Alto integrated its VM-Series virtualized next-gen firewalls with AWS Auto Scaling as well as Elastic Load Balancing (ELB), which can protect data in both private and public clouds. Apart from this, the company also joined the AWS Competency Program for security.
Palo Alto is facing tough competition from rivals such as Cisco Systems (CSCO, Financial) and CyberArk Software (CYBR, Financial). To counter the competition and further strengthen its robust position, the company is further upgrading its product portfolio.
The company recently acquired LightCyber, developer of behavioral analytics technology, for $105 million in cash. Incorporating behavioural analytics into its platform should improve its automated threat prevention capabilities.
Summing up
Since December 2015, Palo Alto’s share price has been downtrending, but that does not mean its growth is over. The company still has huge upside potential due to its subscriber growth rate and platform improvements.
Currently, the stock is down approximately 40% from its all-time highs, presenting a good buying opportunity for shareholders as its future prospects look strong.
Disclosure: No position in the stocks mentioned in this article.
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