New Potential Palo Alto Networks Price Target After Shares Burst
Are we chasing the cybersecurity firm after a strong quarter?
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I mean, I know the sector has its ups and downs, but really, is demand for what cybersecurity firms do ever going to wane?
Of course, a next generation, disruptive technology could change things at some point, but every business and every household needs to secure their information and their systems from the bad actors out there that always seem to be one step ahead of most of us. That said, in my opinion, it makes sense for me to stay invested in the cybersecurity firms that I think are "best in class."
Right now, those two firms. in my opinion, are CrowdStrike Holdings CRWD and Palo Alto Networks PANW. If I went out to three firms, I would put Zscaler ZS in third place.
CrowdStrike will report next week. Zscaler will go to the tape the week after that. Palo Alto reported the firm's fiscal fourth quarter on Monday night. If what Palo Alto told us on Monday night is any kind of harbinger for the group, we'd take that in a heartbeat.
The Quarter
For the three-month period ended July 31, Palo Alto Networks posted an adjusted EPS of $0.95 ($0.36) on revenue of $2.536 billion. While these top- and adjusted bottom-line results both beat Wall Street quite decisively, the revenue print was good enough for year-over-year growth of 15.5%.
This was the second consecutive month for the firm for an accelerating year-over-year pace of sales growth. In fact, this quarter was the firm's fastest pace of annual sales growth since the October quarter of 2023. For the full fiscal year, sales growth was up 15% to $9.2 billion. Remaining performance obligation increased an impressive 24% over the past year to $15.8 billion.
Operations
For the period reported, we already know that revenue generation increased 15.5% to $2.536 billion. Within that number, sales of subscription and support services increased 15% to $1.962 billion and sales of physical products grew 19% to $574 million. The cost of that revenue increased 18% to $679 million, leaving a gross profit of $1.857 billion (+15%) as gross margin dropped from 73.8% to 73.2%.
GAAP operating expenses dropped 1.3% to $1.36 billion, leaving a GAAP operating income of $497.2 million (+108.6%) as GAAP operating margin improved from 10.9% to 19.6%. Once adjusted, operating income grew 31% to $768.2 million as operating margin printed at 26.9%, flat from the year-ago comparison.
After accounting for interest, other income and expenses and taxes, GAAP net income printed at $253.8 million (28.9%), which worked out to $0.36 per fully diluted share. That was down from $0.55 a year ago. Once adjusted, net income increased 28.9% to $673 million. That worked out to $0.95 per fully diluted share, up from the year-ago comp of $0.75. The lion's share of the adjustments made were made for the purpose of share-based compensation as well as for acquisition related costs and tax-related items.
The C-Suite
On the quarter, Chairman and CEO Nikesh Arora commented, "Our strong execution in Q4 reflects a fundamental market shift in which customers understand that a fragmented defense is no defense at all against modern threats. They are partnering with us because our platforms are designed to work in concert, creating powerful operational synergies that deliver superior, near real-time outcomes and the efficiency our customers need. We exited fiscal year 2025 with an acceleration in RPO, and surpassed the $10 billion revenue run-rate milestone, positioning ourselves well for sustained growth ahead."
Additionally, the firm announced the retirement of founder, board member and chief technology officer Nir Zuk. Zuk will be replaced both on the board and as CTO by Lee Klarich, the firm's current chief product officer.
Guidance
For the current quarter, Palo Alto projected total revenue of $2.45 billion to $2.47 billion, taking the low end of the range above the $2.43 billion that Wall Street was looking for. Adjusted EPS is seen at $0.88 to $0.90, again taking the low end of the range above the consensus view for $0.85. Next Generation Security ARR is expected to have grown 29%, while remaining performance obligation is seen growing 23%.
For the full fiscal year just started, total revenue is projected at $10.475 billion to $10.525 billion, well above expectations for about $10.43 billion. Full year adjusted EPS is seen at $3.75 to $3.85, again well above the $3.68 that Wall Street had in mind. Next Generation Security ARR is expected to grow between 26% and 27%, as remaining performance obligation is expected to grow between 17% and 18%. Full-year adjusted gross margin is seen in between 29.2% to 29.7%.
Fundamentals
I haven't seen a statement of cash flows yet, as one had not been provided with the materials. That said, the firm is projecting a free cash flow margin of 38% to 39% for the coming fiscal year, so I would be surprised if, when that statement is released, there is something problematic inside. The press release does allude to string-free cash flow generation for the period reported.
Looking at the balance sheet, the firm ended the period with a cash position of $2.903 billion and total assets of $7.523 billion. Current liabilities add up to $7.988 billion. This includes no shorter-term debt but does include deferred revenue of $6.302 billion. That's not a misprint and that's not a true financial obligation. This puts the firm's headline current ratio at a soft-looking 0.94. Once adjusted for those deferred revenues, this ratio rises to an absolutely robust 4.46.
Total assets amount to $23.576 billion including $5.329 billion in goodwill and other intangibles. At less than 23% of total assets, this is not enough to raise concerns. Total liabilities less equity comes to $15.752 billion. Again, this includes no longer-term debt but does include another $6.45 billion in longer-term deferred revenue. This balance sheet is golden.
My Thoughts
I am impressed. Strong quarter. Strong guidance. Probably strong cash flows. Very strong balance sheet. Growing business. Growing backlog. Not much to complain about. This gets me very excited about CrowdStrike earning next week. As I work on this piece, PANW is up 6.2% on Tuesday morning.
I am quite relieved. As readers can see, there had been a triple-top pattern of bearish reversal in play that with a $144 downside pivot presented significant risk. On Tuesday morning, the shares have burst above their 21-day EMA taking some members of the swing crowd with them. Now, the stock is fighting to take back its 200-day SMA.
The 200-day SMA is the big kahuna on this chart. If PANW can hold that red line, portfolio managers will be forced to increase exposure to the stock. That will likely break the back of the bearish pattern in play. PANW has a reading for relative strength that has just moved back into neutral territory and a daily MACD that is just starting to look a little less ugly. The histogram of the nine-day EMA is back above the zero-bound and the 12-day EMA just crossed above the 26-day EMA.
So, bottom line? Chase this move? If the stock holds that 200-day SMA? Then yes. I am waiting to see what happens there. That's my pivot. That line holds? My target price will be around $220.
At the time of publication, Guilfoyle was long PANW and CRWD equity.
