Palo Alto Networks Is The Leading Cyber Security Play

Results from F-5 Networks NASDAQ: FFIV through Datadog NASDAQ: DDOG, including Checkpoint Software NASDAQ: CHKP and Cloudflare NASDAQ: NET, have put the bottom in cyber security stocks, and now Palo Alto Networks NASDAQ: PANW is leading them higher. Palo Alto Networks is the world's largest cyber-security provider, so it is no wonder it is a go-to name for today’s needs. The company’s transformation from a product to a cloud-based services company also drives growth.

The takeaway for investors is that cybersecurity is still a growing industry, and Palo Alto Networks is the leader. 

"We continue to see our teams execute well in the midst of macroeconomic challenges, helping customers consolidate their security architectures," said Nikesh Arora, chairman and CEO of Palo Alto Networks. "The performance of our software-based and cloud-delivered portfolio validates the significant investments we have made over the last several years and has enabled us to raise our billings and NGS ARR guidance."

Palo Alto Networks Hits It Out Of The Park 

Palo Alto Networks had a strong quarter in which it posted double-digit growth, better than expected results, wider margins and a bottom line beat that has been liked to an “Aaron Judge-like” event. The top line came in at $1.66 billion, up 25.8% versus last year and 60 bps ahead of consensus.

The 60 bps isn’t much on its own but was driven by strength in the Subscription and Services segment. Subscription and Services revenue grew by 29% to outpace the 14.2% increase in product sales, accounting for 78.5% of the total revenue. This is a resounding testament to the company’s transformation and should sustain the business if not grow long into the future. 

Regarding future business, the company’s remaining performance obligation increased by 29% to outpace the topline growth. This is coupled with guidance that calls for 25% to 26% revenue growth in 2023 which more than suggests earnings strength will be present again. Others in the group have seen growth slow significantly from the peaks in 2021 and 2022.

Regarding earnings, the Q2 results have adjusted EPS at $1.05, almost double the prior year, beating the consensus by more than a quarter dollar. This led to an increase in bottom-line guidance that is now forecasting EPS of $3.97 at the low end compared to the $3.82 expected by the analysts. 

Palo Alto Spurs The Analysts To Action 

While other cybersecurity stocks have seen muted analyst activity in the wake of their reports, which is not true of Palo Alto Networks, this company sparked at least 20 major reports, including price target increases. The analysts have been pushing this stock higher for the last 12 months and that trend looks like it is about to stay the same. Now, the Marketbeat.com consensus is near $234 and about 27% above the post-release price action. 

"Taking a step back, the cloud transformation at (Palo Alto) is well underway and the company is becoming the Aaron Judge of cyber security as larger, more strategic deals are getting inked despite the 'best days are in the rear view mirror' Street naysayer crowd," Wedbush analyst Dan Ives wrote in his note to clients. He maintained an Outperform rating while upping his target to $210. 

The Technical Outlook: Palo Alto Networks Moves Higher 

Shares of Palo Alto Networks gained more than 10% following the release and looked like they will continue higher. The price action created a large green candle moving up from the 30-day moving average, a sign of support. The next hurdle for the stock is the $188 level already providing some resistance. If the market can get above there, the stock should move from $200 to $210 on its way up to set a new all-time high.