Buy Palo Alto On Weakness, Wunderlich Says

With Palo Alto Networks Inc (NYSE: PANW) reporting mixed 3Q results, Wunderlich’s Rob Breza believes the metrics are likely to split investor sentiment.

Breza reiterated a Buy rating on the company, with a price target of $190.

Bulls & Bears Will Pick Sides

Following the beat revenue and in-line EPS reported for 3Q, as well as the conservative guidance, the stock declined sharply in after-hours trading.

Breza believes “bulls and bears will pick and choose the key metrics to monitor going forward,” with bulls focusing on the strong billings and operating cash flow growth and bears looking to the revenue growth and lack of operating leverage.

The analyst pointed out, however, that “Palo Alto continues to grow well above industry growth rates through new customer acquisition, expansion in the number of services sold to its existing customer base, and strong demand across its entire product portfolio.”

Related Link: Cybersecurity Follows Palo Alto's Lead

FY16 Guidance

Management has guided to a 4Q16 revenue range of $386–$390 million, marginally below the consensus at its midpoint, with below consensus EPS guidance of $0.48–$0.50.

However, the company reaffirmed its operating margin guidance of 18–19 percent by the end of 2016, as well as free cash flow margin for 40 percent for 4Q16.

“Despite the conservative guidance, PANW commented that it boasts a robust pipeline and continues to see strong demand in a volatile macro environment,” according to the Wunderlich report.

The FY16 and FY17 EPS estimates have been lowered, while the FY16 and FY17 revenue estimates have been raised.