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Palo Alto Networks’ earnings blowout spotlights the Club’s newest stock

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1 year ago

February 22, 2023

Next-generation cybersecurity giant Palo Alto Networks (PANW) delivered a strong quarterly earnings beat Tuesday and raised its full-year outlook on the back of stellar margin discipline, validating our recent choice to make the technology firm the Club’s newest holding. Revenue increased 26% year-over-year, to $1.65 billion, beating analysts’ expectations for $1.65 billion, according to estimates compiled by Refinitiv. GAAP earnings-per-share (EPS) increased to 25 cents on an annual basis, compared with a loss of 32 cents a year prior, handily beating forecasts of a 1-cent-per-share loss, according to Refinitiv. Adjusted EPS grew 81% year-over-year, to $1.05 apiece, ahead of analysts’ forecasts for EPS of 78 cents, Refinitiv data showed. Total billings increased 26% annually, to $2.03 billion, beating estimates of $1.97 billion. Billings provide insight into the health of a subscription software business by measuring what has been invoiced to customers for products and services. Shares of Palo Alto Networks climbed roughly 8% in afterhours trading, to over $180 apiece. Bottom line Palo Alto Networks delivered a lights-out fiscal second quarter Tuesday evening, confirming that security is still one of the most resilient corners of technology spending in this slowing macroeconomic environment. But we would not bless any stock solely because it is in a good industry. It has to be a leader in its field. It has to be not only profitable, but also keenly focused on improving margins and growing free cash flow instead of chasing unnecessary growth. Palo Alto Networks fits that criteria, which is why we started a position last week and will continue to view weakness related to fits in the broader market as opportunities to expand that position. Palo Alto Networks isn’t cheap on earnings, but the company’s durable growth and emphasis on margin expansion mean the stock will ultimately prove a much better value than what it has appeared. Quarterly commentary On a high level, Palo Alto Networks continues to outperform despite a challenging and evolving macroeconomic environment — including higher interest rates — that has forced many business leaders to take a cautious approach. Although Palo Alto Networks is not expecting any major shifts in its business, CEO Nikesh Arora said he expects “more cautious activity” to persist over the next few quarters, including greater deal scrutiny and an emphasis on demanding more value from partners. The good news for Palo Alto Networks is that cybersecurity remains one of the most resilient areas in all of the technology sector, with very few cancellations and no major deals collapsing. And if a customer needs short-term financial help, Palo Alto Networks has the option to be strategic and weaponize its $6.2 billion cash position against smaller security players by offering low financing to close deals. The need for vendors to consolidate their security budgets into fewer players is another trend working in Palo Alto Networks’ favor. Customers are consolidating their budgets to generate better security outcomes with reduced general complexity. And they want more efficient and effective security, playing into Palo Alto Network’s strengths. The number of deals Palo Alto closed that were valued at over $1 million grew nearly 20% year-over-year in the last quarter, while deals worth $5 million more and $10 million and more increased by 84% and 140%, respectively. “Almost all of our $10 million deals involve multiple platforms on an underlying transformation that is driving vendor consolidation,” Arora said Tuesday on a conference call with analysts. Meanwhile, six months ago management shifted its priorities to focus on disciplined profitability, and we are seeing the rewards play out today. The company has slowed its headcount growth to the lowest levels in the last three years and has worked aggressively to ensure it has the right cost structure going forward. These changes are how Palo Alto Networks significantly expanded its non-GAAP adjusted operating margin and free cash flow margin from last year, crushing estimates. As a result, management raised its margin target for fiscal year 2023 by 200 basis points, to a range of 21.5% to 22%, and anticipates more room to grow in fiscal year 2024 and beyond. This quarter marked Palo Alto Networks’ third consecutive quarter of GAAP profitability. The company has now achieved GAAP profitability on a cumulative basis for the last four quarters, making it eligible for inclusion in the S & P 500 , according to management — a development that would likely bolster the company’s stock price. Outlook For Palo Alto Networks’ fiscal year 2023, management raised its outlook across several different metrics. Total billings are now expected to grow between 22% and 23% year-over-year, up from a prior estimate of 20% to 22%, to be in a range of $9.10 billion to $9.2 billion. The $9.15 billion midpoint is higher than analysts’ estimates of $9.05 billion. Adjusted net income-per-share is expected to be in the range of $3.97 to $4.03, compared with a previous estimate of $3.37 to $3.44 a share. The new $4 a share midpoint is well above analysts’ forecasts for $3.42 a share. The company’s adjusted free cash flow margin is expected to be in the range of 36.5% to 37.5%, up from a prior estimate of 34.5% to 35.5%. The company’s fiscal 2023 revenue outlook for $6.85 billion to $6.91 billion remained unchanged. Management also provided guidance for its fiscal third and fourth quarters. The third-quarter revenue and total billings outlook were slightly below consensus estimates, the result of some hardware transactions shifting to the fourth quarter, according to management. (Jim Cramer’s Charitable Trust is long PANW. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Arora Nikesh, Palo Alto Networks CEO & Chairman at the WEF in Davos, Switzerland on May 23rd, 2022.

Adam Galica | CNBC

Source: CNBC

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