Palo Alto Networks: Profitable Long-Term Growth in Cybersecurity (NASDAQ:PANW)

The cybersecurity sector has seen some of its relative premiums quietly evaporate in past quarters.Nasdaq: PANW), which shows that it can continue to grow We are growing our top line at an aggressive pace while driving solid operating leverage. The ability of PANW to do this in the face of a harsh macro environment is impressive and is a testament to the mission-critical nature of cybersecurity products. The recent sell-off has made valuations more acceptable and ultimately encouraged stocks to be recommended without reserves.

PANW stock price

PANW is a durable long-term performer, even considering the tech stock crash.

The last time I covered PANW was in August and I found the shares available for purchase prior to earnings, but I noticed that the shares traded at a noticeable premium to their peers. rice field. After a 20% drop since then, some of that relative premium has worn off. In addition, PANW has also conducted a 1-for-3 stock split on September 14, 2022.

PANW Stock Key Indicators

In the most recent quarter, PANW revenue increased 25% to $1.56 billion. The Billings also increased his 27% to $1.75 billion, and from $1.68 billion he outperformed his guidance of $1.7 billion.

The company also realized operating leverage, which increased GAAP operating income from negative $82.7 million to positive $15.2 million. On a non-GAAP basis, the primary adjustment being stock-based compensation, operating margin expanded from 18% to 20.6%.

On the conference call, management noted that cybersecurity deals are under more scrutiny, with customers asking for discounts and higher payment terms. Like its peers, PANW considers such transactions delays rather than cancellations.

Going forward, PANW expects revenue to grow 26% year-on-year to $1.66 billion, marking continued acceleration.

Management noted that much of the expected acceleration is due to better-than-expected revenues on product shipments previously held back by supply chain constraints. Product revenue is expected to grow by double digits in the fourth quarter.

PANW also raised its guidance for the full year, with earnings expected to grow 26% to $6.91 billion and non-GAAP earnings of $3.44 per share.

Management noted that the company had previously invested aggressively in growth, causing operating profit to grow slower than revenue. However, operating profit is expected to grow significantly faster as the company eventually achieves operating leverage.

PANW ended the quarter with $5.9 billion in cash on $3.7 billion in convertible notes. This represents a solid net cash position. These convertible bonds are already convertible, and I wouldn’t be surprised if the company used its shares to settle an impending maturity.

Similarly, the company did not buy back any shares during the quarter. We found such a decision to be a reflection of welcome humility. Management said it was looking for M&A opportunities amid the crash in technology stocks.

Should I buy, sell or hold PANW shares?

Over the years, PANW has assembled a complete cybersecurity product that has been enhanced through M&A. Many of its products are highly regarded in the industry, making PANW an attractive choice for customers looking for rapid cybersecurity fixes.

PANW’s valuation eventually dropped to more reasonable levels and the stock is now trading at 6x sales.

PANW had previously projected 23% annual revenue growth to $8 billion in 2024.

According to consensus estimates, PANW shatters that guidance by achieving $8.4 billion in projected revenue in 2024.

PANW also led the free cash flow margin to reach 35%. Based on management guidance this year, the company is on track to hit that target a year ahead of schedule.

Based on a projected growth rate of 20%, a long-term net profit margin of 25%, and a price-to-earnings ratio of 1.5x (“PEG ratio”), we found PANW to be trading at 7.5x sales, with the share price at $209 per share, 50% potential upside over the next 1.5 years.

What are the main risks? Many PANWs and cybersecurity platforms maintain a relative premium over other tech peers. We wouldn’t be surprised if the PANW re-interest rate dropped significantly, even if growth slowed due to macro concerns. We could see PANW drop 25% just to trade similarly to its peers. Another risk is competitive risk. Cybersecurity has many formidable competitors, which may lead to market saturation at some point.PANW is in an enviable financial position with its net cash balance sheet and strong cash flow generation, Its stock price has not yet priced in such a bearish scenario. Another risk is that PANW looks like a Wall Street darling. Consider that if the company were simply meeting its previous guidance for earnings in 2024, it would be about 5% below consensus estimates. It’s time to invest broadly in undervalued tech stocks amid the tech crash. PANW fits nicely into such a basket, with stocks offering profitable long-term growth at reasonable valuations. increase.