Why Palo Alto Is A 'Best Idea' For Imperial Capital

• In a report issued Wednesday, Imperial Capital analyst Michael Kim issued an Outperform rating and a one-year price target of $205 on Palo Alto Networks Inc (NYSE: PANW).
• The stock was trading up 1.75 percent on Wednesday.

Last week, Palo Alto reported impressive growth at scale for the first quarter of fiscal 2016. Management highlighted the company’s “continued share gains over legacy vendors, including both network security and point solution providers."

Kim said the firm anticipates robust growth in recurring revenue, “with higher attach rates of subscription services, buoyed by WildFire (advanced threat protection) and Traps (endpoint protection).” Interestingly, the 61 percent billings growth seen in the first quarter suggests considerable near-term expansion, driven by strong security spending from enterprise and government clients.

The analysts now look for potential upside from a growing data center market and a ramp in the deployment of new services like Aperture (SaaS application security) and AutoFocus (threat intelligence). Moreover, “early customer adoption of Traps portends greater penetration into the endpoint security market, which represents a substantial addressable opportunity.” The analysts think this market could be disrupted as a result of the shortage of legacy defenses like antivirus software.

The firm also anticipates surging sales leverage through Palo Alto’s expanding network of channel partners, which could be a main driver of accelerated international growth.

According to Imperial Capital analysts, Palo Alto “is continuing to effectively balance its growth and investments, as reflected by the company’s expanding margins and strong earnings and cash flow.”

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.