Is Palo Alto Networks Stock a Buy After Its Stunning Showing? – The Motley Fool


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Motley Fool Issues Rare “All In” Buy Alert
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The past year has been tough for investors, but especially for those in the technology sector. The tech-centric Nasdaq Composite is still deep in bear market territory, down 28.8% in 2022.
The cybersecurity industry hasn’t fared any better, as evidenced by First Trust Nasdaq Cybersecurity and Global X Cybersecurity — two top cybersecurity exchange-traded funds (ETFs) — which have taken it on the chin as well, losing 23.5% and 27.5%, respectively in 2022. But shareholders of Palo Alto Networks (PANW 0.59%) have been much more “secure,” with shares down 9.8% and beating the broad technology index by a wide margin.
Investors went into the company’s quarterly financial report with a fair amount of trepidation, particularly given the macroeconomic climate characterized by nearly 40-year-high inflation, rising interest rates, and corporate belt-tightening. Shareholders were pleased to find that Palo Alto Networks not only survived but actually thrived over the past three months.
Image source: Getty Images.
For its fiscal 2023 first quarter (ended Oct. 31), Palo Alto Networks delivered revenue of $1.6 billion, up 25% year over year, driven primarily by growing commitments from existing customers. The company also generated adjusted net income of $266 million and adjusted earnings per share (EPS) of $0.83. Palo Alto Networks was also profitable on a GAAP basis for a second consecutive quarter. 
To put those numbers in perspective, analysts’ consensus estimates were for revenue of $1.55 billion and adjusted EPS of $0.69, so Palo Alto Networks scaled expectations with ease. 
It isn’t just the current quarter that looks strong. Remaining performance obligation (RPO) — which represents contractually obligated revenue that isn’t yet included in the financial results — grew 38% year over year to $8.3 billion, which suggests future results will be equally strong.
The company’s customer metrics were also compelling, with the number of enterprise customers spending $1 million or more annually climbing to 1,262, up 23%.
Not only did Palo Alto Networks surprise to the upside, but it showed it has more gas in the tank, as evidenced by its robust outlook. For the fiscal second quarter, management is guiding for revenue of roughly $1.64 billion, or year-over-year growth of 25% at the midpoint of its guidance. 
Investors were particularly pleased by the company’s decision to increase its guidance. For the full fiscal year, management is guiding for revenue of $6.88 billion, up about 26% year over year, with total billings in a range of $8.95 billion and $9.1 billion, which would represent growth of 21% at the midpoint of its guidance.
Furthermore, after back-to-back quarters of profitability, management said it expects the company to remain profitable for all of this fiscal year. Buttressing that case was strong free cash flow of $1.2 billion in the first quarter, while the company simultaneously expanded its operating margins.
As with so many things, the answer to this seminal investing question is: “It depends.” Macroeconomic headwinds remain, and while Palo Alto Networks has bucked the trend of corporate belt-tightening thus far, there are no guarantees its winning streak will continue.
Furthermore, some investors will balk at Palo Alto Networks’ somewhat frothy valuation. The stock is currently trading for 9 times trailing-12-month sales, and a slightly more palatable 6 times next year’s sales — when a reasonable price-to-sales ratio is between 1 and 2. Historically, however, investors have tended to reward high-growth stocks with a premium valuation befitting their better-than-average performance.
In life, as in investing, it’s often true that you get what you pay for. The company continues to grow revenue at an impressive clip, management’s focus on profitability has yielded stunning results, and its free cash flow remains robust. For those reasons alone, Palo Alto Networks is a buy.

Danny Vena has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
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