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Goldman Sachs trims Palo Alto Networks price target, focuses on shift to RPO over billings

EditorAhmed Abdulazez Abdulkadir
Published 21/11/2024, 11:54
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On Thursday, Goldman Sachs (NYSE:GS) adjusted its price target on shares of Palo Alto Networks (NASDAQ: NASDAQ:PANW), bringing it down to $421 from the previous $425, while still holding a positive outlook with a Buy rating. The revision follows Palo Alto's first-quarter fiscal year results, which presented a mixed financial picture.

The cybersecurity company's revenue exceeded Wall Street's expectations by 1%, Next-Generation Security (NGS) Annual Recurring Revenue (ARR) was 2% higher, and Earnings Per Share (EPS) surpassed estimates by 6%, according to FactSet data.

Despite outperforming in some areas, Palo Alto Networks faced challenges, including a gross margin that fell 85 basis points short of expectations, attributed to the ramp-up of emerging products with lower gross margins. Additionally, the company's calculated billings saw a significant year-over-year decline of 14%, which was approximately 20% below analyst projections.

Palo Alto Networks previously indicated a strategic shift away from billings and towards Remaining Performance Obligations (RPO), a move that they noted has facilitated larger deal closures in the first quarter. This approach allows customers to settle with annual billings terms, reducing the need for upfront cash commitments and financing. In line with this strategy, the company has reaffirmed its guidance for RPO growth at 19-20% year-over-year.

Looking ahead, Palo Alto Networks has maintained its long-term Free Cash Flow (FCF) margin target at 37-38%. The company anticipates that the headwinds from billings will be balanced by improved operating margins, better linearity in business, and collections from previously financed deals through Palo Alto Networks Financing Solutions (PAN FS).

In other recent news, Palo Alto Networks has reported significant growth in its first quarter of fiscal year 2025. Total (EPA:TTEF) revenue increased by 14% to $2.14 billion, while Next-Generation Security (NGS) Annual Recurring Revenue (ARR) saw a 40% rise, surpassing the $4.5 billion mark. Earnings per share (EPS) also grew by 13%, accompanied by an expansion in operating margins. Analyst firms DA Davidson, BTIG, and Evercore ISI have all maintained a positive outlook on the company, with DA Davidson increasing its price target from $415.00 to $435.00, BTIG from $395.00 to $414.00, and Evercore ISI reiterating a target of $455.00.

Palo Alto Networks' recent acquisition of QRadar SaaS has added $74 million to NGS ARR, contributing to the company's full-year FY25 revenue guidance. The company has also launched the Prisma Access Browser, acquiring over 115 new customers, and expanded its portfolio with over 70 new platformizations. The company's raised full-year guidance for NGS ARR, revenue, and EPS reflects confidence in its growth trajectory. Palo Alto Networks also announced a 2-for-1 stock split to improve accessibility for employees and investors.

InvestingPro Insights

Palo Alto Networks' recent financial performance and strategic shifts are reflected in the latest InvestingPro data and tips. The company's market capitalization stands at $128.57 billion, underscoring its significant presence in the cybersecurity sector. Despite Goldman Sachs' slight reduction in price target, PANW's stock is trading near its 52-week high, with a robust year-to-date price total return of 33.24%.

InvestingPro Tips highlight that PANW is trading at a low P/E ratio relative to near-term earnings growth, with a PEG ratio of 0.11. This suggests potential undervaluation considering the company's growth prospects. However, it's worth noting that PANW is still trading at high EBIT and EBITDA valuation multiples, which aligns with the company's premium position in the software industry.

The company's focus on RPO growth is supported by its strong revenue figures, with the latest data showing $8.03 billion in revenue over the last twelve months and a growth rate of 16.46%. This strategy seems to be paying off, as PANW maintains a healthy gross profit margin of 74.35%.

For investors seeking a deeper understanding of Palo Alto Networks' financial health and market position, InvestingPro offers 18 additional tips, providing a comprehensive analysis to inform investment decisions.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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