Goldman Recommends Palo Alto Networks

Goldman Sachs GS is out this morning with an “Attractive coverage view” of security sector “disruptor” Palo Alto Networks PANW with an individual ratings of Conviction Buy and a price target of $97 (a 27.64 percent premium to yesterday’s close) .

Goldman notes evolving cyber threats producing costly data breaches and factors supporting increased M&A activity as a reason for being bullish. PANW is the investment banks’ top pick. PANW’s positioning as a long-term growth disrupter and accelerating profitability will continue to exceed forecasts from Wall Street analysts.

The majority of those responding (59%) to Goldman’s survey regarding security spending said they will increase spending with a new vendor, favoring stocks like PANW and FireEye FEYE. Consensus expectation for PANW revenue is $581M for FY2014 vs Goldmans forecast of $582M. As for FY2015, consensus expected $779M and Goldman sees $802M being docked as revenue. As for Free-Cash Flows, Goldman’s FY2015 forecast is 18.4 percent above the consensus.

Compared with 2012, PANW’s share of security sector revenues grew, alongside that of FireEye while Cisco Systems CSCO and Juniper Networks JNPR lost some of their share of revenues:

The speed of PANW growth ranks in the top of the sector and is supported by “increasing contribution to growth from the existing base”. High-profile breaches have driven firms to analyze firewalls and re-evaluate IT security measures and this is a top catalyst for Goldman alongside improving sales productivity, robust product pipeline, and improving sales.

Goldman recommendations of this character carry weight on Wall Street and traders and investors would be wise to analyze and evaluate the suitability of the risks involved with trying to capture M&A Alpha through a PANW acquisition by a large security/technology player.