Source: Investing Published 08/20/2024, 13:54
JPMorgan has updated its outlook on Palo Alto Networks (NASDAQ: PANW) stock, raising its price target to $387 from $365 while maintaining an Overweight rating on the stock.
The firm’s analysis highlighted Palo Alto’s strong fourth-quarter results, which beat expectations with next-gen annual recurring revenue (Next Gen ARR), non-GAAP revenue, operating margin and EPS. Particularly impressive was the company’s free cash flow (FCF) margin, which came in at nearly 39%.
The company’s outlook for the future is optimistic, despite conservative expectations for growth in remaining performance obligations in FY25. The guidance for next-generation remaining performance obligations, revenue growth, operating margin expansion, and financing margin for FY25 were seen as more than compensatory.
While Palo Alto Networks will no longer provide billings guidance, management’s comparison of FY25 operating and financing commitments guidance to an expected 12% year-over-year billings growth was viewed as positive, especially given the forecast for 11% growth.
Palo Alto Networks is navigating the headwinds of incentivizing customers to integrate into its platform, a strategy referred to as “going platform-first.” The company reported gaining momentum in Secure Access Service Edge (SASE), Cloud Security Service, and Cortex, while maintaining healthy margin levels. It is believed that upfront incentives will be balanced by strong ARR exits. Looking ahead to FY25, the expected closing of the QRadar deal by the end of September is expected to boost Palo Alto’s platform by an additional $80 million in ARR. The company is also well positioned to benefit from the $500+ million of QRadar’s remaining on-premises business moving to SaaS, which could double prices.
While billings, revenue, and net earnings are expected to remain subdued in the near term, growth is expected to pick up during FY25. The company is expected to see a rebound in revenue growth and sustainable net capital gains as the impact of the platform conversion incentives wanes.
InvestingPro Insights
With JPMorgan expressing confidence in Palo Alto Networks’ (NASDAQ:PANW) growth trajectory, key metrics from InvestingPro reinforce the positive outlook. With a strong market cap of $111.18 billion, Palo Alto Networks is trading at a high P/E multiple, with a price-to-earnings ratio of 43.94, indicating investor confidence in its future earnings potential. The company’s revenue growth remains strong, with an increase of 20.05% over the past twelve months as of Q3 2024, underscoring its strong performance in the competitive software industry. Furthermore, Palo Alto Networks boasts an impressive gross profit margin of 74.43%, indicating management efficiency and a strong market position. InvestingPro’s advice suggests that Palo Alto Networks’ net income is expected to grow this year, in line with the optimistic guidance for FY25. Additionally, the company’s high one-year TSR of 63.75% highlights the high yield the company has generated over the past year, an attractive point for investors looking for growth stocks. Although Palo Alto Networks operates with a moderate level of debt and does not pay a dividend, its cash flows can adequately cover interest payments, ensuring financial stability.
