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Here's Why The Market Should Love Palo Alto's Q3

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Here's Why The Market Should Love Palo Alto's Q3
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Palo Alto Networks Inc (NYSE: PANW) reported its 3Q16 EPS in-line with expectations, despite a significant revenue beat. JPMorgan’s Sterling Auty maintained an Overweight rating for the company, while reducing the price target from $216 to $196.

Shares lost more than 10 percent after hours, with concerns over decelerating product revenue. Analyst Sterling Auty said, however, that this was a “myopic view” of the Palo Alto’s success, since it did not consider sustainable +30 percent revenue growth, driven by increases in subscription, margin expansion, and a 40 percent CAGR in FCF through FY18.

“The one pushback we understand from the market is the backend loaded nature of the quarter and comments about macro impacts, but with 61% growth in billings the execution has been unassailable, in our view,” Auty wrote.

Related Link: Cybersecurity Follows Palo Alto's Lead

Positives For The Company

Although Palo Alto’s EPS was in-line, this was due to the higher mix of subscription billings, “which generates upfront commission expense versus ratable revenue recognition,” the analyst pointed out. Moreover, the company generated best-in-class billings growth of 61 percent, driven by “an increasing uptake of the eight subscriptions PANW now has available.”

Palo Alto’s product revenue missed expectations. Management had been indicating a shift toward subscription revenue for several quarters. Auty commented that the Street had been slow to incorporate the shift, while adding that this strategy “offers greater long-term value given the margin profile and high renewal rates on this revenue stream.”

Latest Ratings for PANW

DateFirmActionFromTo
Mar 2017Argus ResearchDowngradesBuyHold
Mar 2017JP MorganDowngradesOverweightNeutral
Mar 2017BairdDowngradesOutperformNeutral

View More Analyst Ratings for PANW
View the Latest Analyst Ratings

Posted-In: JPMorgan Sterling AutyAnalyst Color Long Ideas Price Target Reiteration Analyst Ratings Trading Ideas Best of Benzinga

 

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