Palo Alto Networks' U-Turn Won't Last Long

Palo Alto Networks (PANW) reported Q4 quarter recently, and the results were just fine as the company surpassed the analysts’ estimates on revenue while its EPS of $0.50 was in-line with the Wall Street analysts. On the revenue front, Palo Alto Networks reported a jump of 41.2% year over year to $400.8 million, and it made it obvious that the days of the company reporting 50%+ growth are over.

Despite the beat, Palo Alto Networks fell almost 8% after releasing the results due to the company’s weak guidance. Palo Alto Networks now sees Q1 revenue in the range of $396 million-$402 million signifying a growth of just 34% whereas EPS is expected to be in the $0.51-$0.53 range.

Palo Alto Networks did a U-turn almost instantly as the shares recovered in the next trading session to move higher.
As of writing this article, its shares are higher than they were before the earnings release. Although the recovery has been very impressive, I don’t expect Palo Alto Networks to continue moving higher.

In fact, there are many reasons to bet against the stock, which is why I think investors shouldn’t buy into the rally.
Palo Alto Networks
Image by geralt / Pixabay
As mentioned above, Palo Alto Networks’ days of 50%+ revenue growth are over, and its growth will continue dropping in the quarters to come.

With the company trading at a premium, the rapid slowdown in growth will not go down well with investors. Non-profitable growth companies tend to crash hard when their growth slows down drastically, and I expect the same to happen with Palo Alto Networks.

The company has been bullish on its free cash flow growth. However, given the high stock-based compensation, its FCF growth isn’t really impressive. Although the company sanctioned a buyback in the recent quarter, its shares outstanding count has increased consistently over the last few months, which ultimately destroys shareholder value.

As a result of both these factors, I think Palo Alto Networks is a strong sell right now. Investors shouldn’t buy into the rally, as I expect Palo Alto Networks to head lower in the months to come. Slowdown in growth won’t go down well with investors who are paying a premium to buy a market leader in a growing industry.

Given the stretched valuation and the fact that Palo Alto Networks’ growth will soon drop to under 20%, I don’t think the stock will be able to sustain its current valuation for a long time.
Published on Sep 7, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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