Palo Alto Networks' Pre-Q4 Earnings Analysis: Hold or Fold the Stock?
Palo Alto Networks projects its fiscal fourth-quarter revenues in the range of $2.49-$2.51 billion, which suggests a year-over-year increase of 14-15%. The Zacks Consensus Estimate is pegged at $2.50 billion, which implies growth of 14.2% from the year-ago reported figure.
After a two-for-one stock split of PANW stocks on Nov. 20, 2024, the consensus mark for PANW's fiscal fourth-quarter non-GAAP earnings has remained unchanged at 88 cents per share over the past 60 days, which calls for a 17.3% increase from the year-ago quarter's earnings.
Image Source: Zacks Investment Research
Palo Alto Networks' earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 5.1%.
Palo Alto Networks, Inc. Price and EPS Surprise
Palo Alto Networks, Inc. price-eps-surprise | Palo Alto Networks, Inc. Quote
Earnings Whispers for PANW
Our proven model does not conclusively predict an earnings beat for Palo Alto Networks this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat, which is not the case here.
PANW has an Earnings ESP of -0.53% and carries a Zacks Rank #3 at present. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter. You can see the complete list of today's Zacks #1 Rank stocks here.
Factors Likely to Influence PANW's Q4 Results
Palo Alto Networks' fourth-quarter fiscal 2025 performance is likely to have gained from the robust traction stemming from deal wins, along with continued progress in its platformization strategy, is expected to have pushed its revenues up. The increased adoption of its AI-powered XSIAM, SASE, and software firewall offerings, which enable enterprises to advance zero-trust network security, is likely to have contributed to the growing share of incremental Next-Generation Security Annual Recurring Revenues.
Accelerating the adoption of multi-product platformization deals, often spanning both cloud and network security, is likely to boost overall platform uptake. In the third quarter, the company closed more than 90 new platformization transactions, bringing the total to approximately 1,250 within its top 5,000 customers. The accelerated migration to Palo Alto Networks' cloud platform is likely to have improved the adoption of its platforms. Moreover, the increased use of the cloud and remote networks in a hybrid working environment has resulted in escalating cyberattacks. This is leading to a rise in the demand for cybersecurity solutions. PANW's fiscal fourth-quarter performance is likely to have benefited from this demand surge.
Federal Risk and Authorization Management Program (FedRAMP) recognitions are boosting the adoption of Palo Alto Networks' products by government organizations. The company's Prisma Access, Cortex XDR, Cortex Data Lake, Prisma Cloud and WildFire received FedRAMP recognitions. This FedRAMP recognition reflects the U.S. public sector's trust in PANW's IoT security solutions. This is anticipated to have encouraged the adoption of its products during the period under discussion.
However, Palo Alto Networks is experiencing headwinds related to cannibalization risks related to the shift from its hardware to software and cloud-based solutions. Furthermore, as PANW's recently launched software has not yet achieved scale, it might have weighed on the gross margin in the to-be-reported quarter.
Price Performance & Stock Valuation
In the past year, Palo Alto Networks' shares have gained 3.2%, underperforming the Zacks Security industry's growth of 20.2%. The stock has also underperformed its industry peers, including CyberArk CYBR, CrowdStrike CRWD and Zscaler ZS. In the past year, shares of CyberArk, CrowdStrike and Zscaler have gained 53%, 65.5% and 45.9%, respectively.
One-Year Price Return Performance
Now, let's look at the value Palo Alto Networks offers investors at the current levels. Palo Alto Networks is currently trading at a low price-to-sales (P/S) multiple compared to the industry. PANW's forward 12-month P/S ratio sits at 11.23X, lower than the industry's forward 12-month P/S ratio of 11.9X.
PANW Forward 12-Month P/S Ratio
Palo Alto Networks stock also trades at a lower P/S multiple compared with other industry peers, including CyberArk, CrowdStrike and Zscaler. At present, CyberArk, CrowdStrike and Zscaler have P/S multiples of 14.14X, 20.23X and 13.49X, respectively.
Investment Consideration
Palo Alto Networks' innovative product offerings, strong customer base and expanding market opportunities in areas like Zero Trust and private 5G security solutions drive its growth potential. PANW's continuous technological advancements make it a compelling long-term investment opportunity.
Nevertheless, Palo Alto Networks' near-term prospects might be hurt by softening IT spending as enterprises postpone large tech investments due to macroeconomic uncertainties and geopolitical issues. Over the past year, Palo Alto Networks has reported a slowdown in revenues, billings and adjusted earnings growth, citing uncertain macroeconomic conditions as the main cause.
Conclusion: Hold Palo Alto Networks Stock Now
Palo Alto Networks faces macroeconomic headwinds and challenges from the shift to software and cloud offerings, which can lead to revenue cannibalization. However, its strong go-to-market execution, including rapid platformization adoption and expansion into key growth areas, is helping it win customers and expand market share. While near-term pressures remain, the company's innovation-led strategy and long-term growth prospects make PANW a stock worth holding at present.
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