3 Reasons Why Morgan Stanley Says Palo Alto Is A Software Standout

Palo Alto Networks Inc PANW reported second-quarter results after the close Monday that not only included a top-and-bottom-line beat, but "[throw] cold water" on the case against owning the stock, according to Morgan Stanley.

The Analyst

Morgan Stanley's Keith Weiss maintains an Overweight rating on Palo Alto's stock with a price target boosted from $190 to $205.

The Thesis

Palo Alto reported "another solid quarter" that highlighted emphasized not only why it is a standout in the software space, but offered three key reasons why bears are wrong, Weiss said in a Tuesday note: 

• Palo Alto showed an acceleration in new customer additions from 2,130 adds per quarter in fiscal 2017 to 3,000 in the recent quarter. Product revenue growth of 20 percent came at a time when the overall market is growing at a high-single digit rate.
• The software name reported metrics that show it's able to gain exposure in markets outside of its core firewall opportunity, including. Those figures include 20-percent total billings growth, an estimated 26-percent growth in subscription billings and cloud subscription billings growth of more than 85 percent.
• Palo Alto reported multiple "compelling upsell metrics," including a 54-percent jump in spending among its 25 biggest clients, the analyst said This emphasizes the "growing rather than shrinking strategic importance" of the company within the enterprise security architecture.

Looking forward, Palo Alto could sustain a 20-percent or more growth rate in free cash flow through fiscal 2019, which may signal the stock's current 13x EV/CY19 FCF multiple is "too low," Weiss said. 

Price Action

Shares of Palo Alto Networks hit a new multi-year high of $179.15 Tuesday morning and was last seen trading at $174.28, up 2.82 percent on the day.

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