Palo Alto Surges on Impressive Q3 Results and Robust Guidance

Shares of Palo Alto Networks (NASDAQ: PANW) surged 10.7% in the extended trading session on Thursday, May 19, as the cybersecurity provider delivered better-than-anticipated results for Q3 FY22 (ended April 30, 2022). Shares were up 11.4% in Friday’s pre-market trading at the time of writing.

The increased threat of cyber attacks amid the ongoing geopolitical conflict and accelerated digital transition of corporations has fueled strong demand for Palo Alto and other cybersecurity companies.   

Q3 Highlights

Revenue for Q3 FY22 rose 29% year-over-year to $1.39 billion, beating the Street’s consensus estimate of $1.36 billion. Adjusted EPS surged nearly 30% to $1.79 and exceeded analysts’ estimates of $1.68. Despite higher components costs and shipping expenses due to supply chain woes, Palo Alto’s profitability improved due to the company’s efficiency measures.

Product revenue grew 22% to nearly $352 million even as supply chain challenges impacted the company’s ability to meet the demand. Subscription and support revenue rose 32% to $1.04 billion and accounted for 75% of overall Q3 FY22 revenue.

Upbeat Outlook

Palo Alto expects revenue to grow in the range of 25% to 27% to $1.53 billion to $1.55 billion in Q4 FY22. It expects adjusted EPS to come in the range of $2.26 to $2.29, compared to $1.60 in the prior-year quarter.

Based on the strength across its portfolio, Palo Alto increased its full-year outlook. It predicts total billings to grow between 30% to 31% in FY22, compared to the prior growth outlook of 25% to 26%.

Revenue is anticipated in the range of $5.481 billion to $5.501 billion, which reflects nearly 29% growth. Palo Alto had earlier guided for revenue in the range of $5.425 billion to $5.475 billion.

It now expects FY22 adjusted EPS between $7.43 to $7.46, up from the previous outlook of $7.23 to $7.30. On the earnings call, management cautioned that supply chain bottlenecks are “likely to persist for yet another year.”

Wall Street’s Take  

Ahead of the Q3 results, Mizuho analyst Gregg Moskowitz lowered his price target for Palo Alto stock to $600 from $625 but maintained a Buy rating. Given the intense selloff in software stocks and the broader market in recent weeks, the analyst cut his targets on high-growth software vendors due to a “greater degree of macro uncertainty.”

However, Moskowitz stated that recent channel checks revealed that software demand has “remained good overall,” particularly for digital transformation and/ or security projects.

All in all, Palo Alto scores a Strong Buy consensus rating based on 23 Buys and two Holds. At $644.60, the average Palo Alto price target implies upside potential of 47.72% from current levels.

Conclusion

Cybersecurity companies are expected to see strong demand for their products and services amid rapid digitization and geopolitical tensions triggered by the Ukraine-Russia conflict. Palo Alto is well-positioned to expand its market share in a large addressable market.

TipRanks data shows that financial blogger opinions are 89% Bullish on Palo Alto, compared to a sector average of 67%.

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