Palo Alto: Brace For Impact Ahead Of Earnings

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Leading cybersecurity institution Palo Alto Networks, Inc. (NASDAQ:PANW) is scheduled to study its FQ2'23 net results (for CQ ended January 2023) connected February 21.

Savvy investors picked PANW's bottommost successful early January, pursuing nan risk-on sentiment that returned to tech stocks. Accordingly, PANW has recovered astir 35% from its January lows toward this week's highs.

Therefore, we judge investors person apt anticipated an optimistic net study from Palo Alto Networks, expecting it to support aliases surpass its FY23 guidance.

As a reminder, nan institution guided FY23 gross growth of 25.5% astatine nan midpoint, conscionable somewhat supra nan statement estimates of 25.2% growth. Moreover, nan company's guidance scope of 25% to 26% suggests that Palo Alto has tremendous gross visibility, contempt nan worsening macro headwinds.

Therefore, nan company's expertise to navigate highly challenging economical conditions wherever income cycles are expected to remain elongated should not beryllium understated.

Keen investors should cognize that Palo Alto Networks has a wide cybersecurity portfolio encompassing capabilities successful SASE, unreality information (including zero-trust), and endpoint information pinch XDR.

Hence, it's well-placed to protect on-premise and cloud-based workloads, peculiarly effective for companies pinch multi/hybrid unreality architecture. While nan company's next-gen solutions, specified arsenic unreality security, are expected to thrust its top-line growth, its bequest solutions supply nan customer guidelines and broader take opportunities.

Hence, Palo Alto Networks could beryllium successful a overmuch amended position than pure-play unreality peers to leverage nan inclination toward vendor consolidation, spurred by worse macro headwinds forcing CISOs toward costs optimization.

Moreover, Palo Alto Networks believes it has nan next-gen zero trust solution aliases ZTNA 2.0, which is expected to merge its customers' hybrid workplace situation better.

Therefore, we aren't amazed that PANW has seen patient buying support astatine important dips. In addition, astute investors apt capitalized to adhd much positions, arsenic nan accrued request for cybersecurity will not disappear.

Moreover, Palo Alto Networks is assured that its AI/ML capabilities "will thief foretell and resoluteness issues earlier they origin business disruptions."

Accordingly, CEO Nikesh Arora reminded investors that he started to infuse artificial intelligence into Palo Alto Network's offerings erstwhile he started much than 4 years ago. Arora stressed:

Our full AI capacity is centered astir everything we're doing successful Cortex [XDR]. Security needs to go real-time. You can't do thing [in] real-time unless you person bully data. So we spent nan past 4.5 years figuring retired really to get bully data, which is why we [launched] nan products 12 weeks called Cortex XSIAM. The full conception location is you cod each nan information you can. You tally AI models against it and effort and remediate secured. Expanse is 1 facet of it. It is nan aspect, which looks astatine data, which you tin spot from nan extracurricular in. And Cortex XSIAM looks astatine it from [the] wrong out. So I think, yes, AI is going to person a immense effect connected really real-time information is deployed. (Barclays Global Technology, Media and Telecommunications Conference)

We deliberation location should beryllium small uncertainty that Palo Alto is simply a clear leader successful nan cybersecurity space. Hence, nan mobility astir its maturation valuation has consistently attracted statement pinch bulls and bears connected whether PANW deserves its premium.

PANW past traded astatine an NTM EBITDA aggregate of 29.6x, beneath its 10Y mean of 36.7x (20% below). However, PANW has had trouble sustaining its valuation supra its 10Y mean since its highest successful early 2022, suggesting nan marketplace had apt de-rated it.

Hence, we judge immoderate prudence is justified by demanding a important discount beneath its 10Y mean for an improved reward-to-risk entry.

Given nan precocious valuations of cybersecurity stocks, we besides don't promote investors to load their portfolios pinch excessively galore cybersecurity companies to mitigate valuation compression risks.

Despite that, We person assurance that Palo Alto's accordant free rate travel (FCF) profitability and robust ARR visibility position it arsenic 1 of nan premier candidates for investors to see carefully.

However, nan mobility remains: Is nan existent value action and valuation constructive for investors looking for a little risky introduction zone?

PANW value floor plan (weekly) (TradingView)

As seen above, PANW has surged good supra its January lows but is still successful a medium-term downtrend, resisted by its November 2022 highs.

So, PANW investors request to see whether they deliberation its January bottommost is robust capable to prolong its carnivore marketplace lows earlier recovering its upward bias?

We noted that PANW's January lows corresponded to an NTM EBITDA aggregate of 22x, successful statement pinch nan 1 modular deviation area nether its 10Y average. In different words, it was comparatively charismatic compared to its humanities valuation averages.

We besides noted a bullish reversal value action successful January, predicated against a mendacious downside breakdown (or carnivore trap) against nan lows successful May 2022. In different words, marketplace operators apt utilized highly pessimistic sentiment astatine nan commencement of January to lead anemic PANW holders to waste low. However, nan "attempt" to break beneath May 2022 lows was firmly rejected earlier staging a stunning bullish reversal to displacement its momentum backmost up.

Hence, we judge PANW's January lows should clasp robustly. Therefore, investors considering adding vulnerability should capitalize connected immoderate consequent pullback (hopefully anemic net outlook).

Rating: Hold (Reiterated).

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