Palo Alto Networks' U-Turn Won't Last LongPANW) 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.
In fact, there are many reasons to bet against the stock, which is why I think investors shouldn’t buy into the rally.
As mentioned above, Palo Alto Networks’ days of 50%+ revenue growth are over, and its growth will continue dropping in the quarters to come.
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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, 2016By Ayush Singh