Palo Alto Management 'Confident' In Long-Term Outlook, RBC Boosts Price Target To $200

In a report published Thursday, RBC Capital Markets analysts Matthew Swanson, Dan Bergstrom, Ross MacMillan and Matthew Hedberg reiterated their bullish thesis on Palo Alto Networks Inc PANW (Outperform rating), boosting their price target from $180 to $200.

The analysts had the opportunity to market with the company and left feeling confident, as they continue to think security spending intentions remain strong and “upside could come from the internal renewal cycle, expanded distribution (Westcon and SIs) and share-shift, endpoint and additional margin expansion.”

The firm highlights four key points driving their bullishness:

• Following a strong quarterly report, management looks confident on the long-term prospect of becoming the largest security company in the globe. Regarding the sustainability of security spending, “Management believes customers are buying what they need today and that they are in the very early innings of their own internal renewal cycle, which we believe could be a catalyst over the next few years,” adding that the opportunity to upsell is significant.
• Expanded distribution opportunities and partnerships should continue to generate upside. The analysts add, “While Westcon should continue to be a significant driver for international share gains, we believe other channels such as the SIs (ACN, PWC, etc) could also positively impact results. Further, we remain bullish on the VMW/NSX partnerships as the joint offering should be a driver of sales. Finally, PANW plays well with others like SPLK, PFPT, etc which should help expand the ecosystem.”

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• The analysts see a call option in endpoint security. “Investors remain skeptical on the $4B endpoint opportunity as Traps remains nascent with plenty of competition.” In fact, most investors think AV is either dead or commoditized, but believe competition with FireEye Inc FEYE, Bit9, Tainium and other similar companies continues to be intense. “Management is happy with early Traps wins and believes its approach to end-point is not ‘me-too’ but differentiated from others.” It’s a wait and see situation, but they still put endpoint into the call option category and think the core network opportunity remains sturdy.
• Margin and free cash flow expansion continues to be impressive. RBC believes free cash flow margins could hit the mid-30 percent threshold by fiscal 2017.