Tracking the equity investments made by politicians can be a good strategy. Typically, individuals in power have access to information that’s not available to the retail investor. In a new disclosure last month, U.S. Representative Nancy Pelosi purchased call options of Palo Alto Networks (PANW) totaling $1.25 million, with a strike price of $200 and an expiration date as far out as January 2025, according to Quiver Quantitative data.
Overall, members of Congress traded PANW stock 10 times in the last six months. Seven of these transactions were purchases, and three were sales. As the cybersecurity play attracts heightened interest on Capitol Hill, let’s see whether PANW is a good stock to buy right now.
An Overview of Palo Alto Networks
Palo Alto Networks (PANW) is among the largest companies in the cybersecurity segment. It offers a portfolio of products and solutions to enterprises across various sectors, with its robust cybersecurity platforms and services backed by threat intelligence capabilities and strengthened by automation.
Valued at a market cap of $94.06 billion, Palo Alto Networks stock has returned over 1,100% to shareholders in the last decade. Despite its market-beating gains, PANW stock trades about 25% below its recently set all-time highs, allowing you to buy the dip.
Q2 Earnings from PANW Disappointed Investors
Shares of Palo Alto Networks dropped 19% in a single trading session following the release of its fiscal Q2 of 2024 results. The company reported revenue of $1.98 billion and adjusted earnings of $1.46 per share for the quarter ended in January. Comparatively, analysts forecast revenue at $1.97 billion and earnings at $1.30 per share in Q2. So, why did PANW stock plunge, despite topping Wall Street estimates?
Well, investors were left unimpressed with Palo Alto’s guidance. The cybersecurity giant forecast billings between $10.1 billion and $10.2 billion, lower than previous estimates of $10.7 billion and $10.8 billion. Management also forecast fiscal 2024 sales between $7.95 billion and $8 billion, below its initial guidance of $8.15 billion to $8.2 billion.
During the company’s earnings call, CEO Nikesh Arora attributed the lower guidance to a shift in strategy, as it now wants to accelerate growth, platform migration and leadership in the AI segment.
What Impacted Q2 Sales for Palo Alto Networks?
While Palo Alto Networks grew sales by 19% year over year, its RPO (remaining performance obligations) increased by 22%, while billings rose by 16%.
Similar to other tech companies, PANW has an asset-light balance sheet, allowing it to report an operating margin of 28.6% - indicating an expansion of 600 basis points year over year. In the last 12 months, it reported a free cash flow of $2.9 billion, and Palo Alto Networks' widening profit margins increased adjusted earnings per share by 39% to $1.46 in Q2.
Palo Alto continued to drive large deals, reporting 10 transactions worth $20 million each in Q2. Its 10 highest-spending customers increased their spending by 36% in the January quarter.
PANW is also seeing higher ARR (annual recurring revenue) growth in its network security and SASE (secure access service edge) business. In this segment, its ARR rose by 50% for the fifth consecutive quarter. Over 30% of its SASW customers signed in Q2 were new clients, indicating the company can gain market share with this industry-leading product.
What Is the Target Price for PANW Stock?
Analysts covering Palo Alto Networks expect sales to rise by 15.8% to $8 billion in fiscal 2024, and by 14.2% to $9.1 billion in fiscal 2025. Its adjusted earnings are forecast to expand from $4.44 per share in 2023 to $6.15 per share in 2025.
Priced at 46x forward earnings, PANW stock is quite expensive, given analysts expect earnings to grow by 17.8% annually in the next five years.
Out of the 40 analysts covering Palo Alto stock, 27 recommend “strong buy,” two recommend “moderate buy,” and 11 recommend “hold.” The Street-high target price for PANW is $420, indicating an upside potential of over 48% from current levels.
