Wunderlich Sees 29% Upside In Palo Alto Shares

Wunderlich expects Palo Alto Networks Inc PANW to gain share significantly since there is an opportunity for 30–35 percent revenue growth for multiple years.

Analysts Bill Choi and Ryan MacDonald aren't worried about the high valuation since they see long-term margin expansion and robust growth profile to provide 29 percent upside potentials. They preferred a Buy rating with a target price of $190 on shares.

In the last four quarters, the company's EPS provided positive surprise ranging between 29.5 percent and 34.7 percent.

The brokerage sees favorable trends for Palo Alto for share gains against incumbents. The adoption of PA-7080 for internet gateway or service delivery would offer upside potentials to the stock.

The analysts see headwinds in the form of growing cloud adoption, thus shifting demand from hardware to software. Aside from that, in the two years' time, the company could witness drop in incremental gains from firewall refresh cycle.

In a note, the analyst said, "We believe customers are consolidating the "defense-in-depth" perimeter, as each subscription would displace a standalone offering from other vendors. Of the 4 hardware-attached subscriptions, quarterly attach rates increased from 1.9-2.1x to 2.6x. Upsell of one additional service to entire installed base would represent over $500mm in annual sales."

The brokerage sees Palo Alto gaining from standalone subscriptions as the company is eager to enhance the product for easy deployment apart from promotional activities like boosting subscription commissions.