Palo Alto Network's Valuation Is Close to Full; Goldman Downgrades

Network vendor Palo Alto Networks Inc (NYSE: PANW) has earned raving reviews from Goldman Sachs, with the firm touting it to be the best-of-breed network security vendor. Notwithstanding the positive opinion, the firm downgraded shares.

The Analyst

Goldman Sachs analyst Gabriela Borges downgraded Palo Alto Networks from Buy to Neutral, as she believes the risk/reward is balanced at current levels. The analyst has a 12-month price target of $168.

This is in contrast to a recent Evercore ISI note, which said shares have compelling risk/reward.

The Thesis

The outlook for the network security industry is muted in 2018, with an industry refresh unlikely until 2019 or 20202, Borges said in a Monday note. The assumption is based on the lengthy five- to six-year refresh cycles and firewall adoption lagging public cloud adoption to-date.

The Street estimates, according to Borges, assume market share gain of 80-100 basis points per year. However, the analyst said upside relative to this is unlikely.

Additionally, the visibility on Palo Alto platform's success outside of the firewall space is limited.

"Taken together with mixed execution over the past two years and considering valuation normalizing for growth and stock-based compensation, we believe the stock is close to fully valued," Borges said.

The firm attributed the underperformance of Palo Alto versus the S&P 500 Index to the mixed execution of the company, with sales force restructuring and slowing appliance growth.

The Price Action

Over the past year, shares of Palo Alto Networks have added close to 11 percent.

Reacting to the downgrade, shares were slipping 3 percent to $152.49.

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