Palo Alto Earnings: We Look Past the Billings Wobble as It Clocks Another Strong Period

Key Morningstar Metrics for Palo Alto Networks

• Fair Value Estimate: $250.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Palo Alto Networks’ Earnings

We are raising our fair value estimate for Palo Alto Networks PANW stock to $250 from $245 after the firm kicked off fiscal 2024 with strong results, including better-than-expected profitability. While competitors like Fortinet FTNT have seen their forward-looking metrics affected by a downturn in customer spending on hardware appliances, Palo Alto’s pivot away from hardware firewalls continues to insulate its financials and metrics.

As part of this pivot, the firm has built security solutions that serve a wide range of customer needs. These non-firewall security platforms have enabled it to maintain a robust business pipeline and produce strong financial results.

With shares trading down about 6% after hours, we believe investors got spooked by Palo Alto reducing its fiscal 2024 billings guidance by $200 million to $10.75 billion, at the midpoint of the guidance range. We don’t see this as a sign that deals are slipping or that customers are being conservative with their spending. Rather, we think Palo Alto is encouraging customers to sign annual deals, which carry a lower billing amount than multiyear ones. This would be an issue if these customers were free after one year, but thanks to high switching costs on these solutions, we think the likelihood of that is low. We’d also point investors to other forward-looking metrics, such as remaining performance obligations, as better indicators of Palo Alto’s overall business health.

Palo Alto’s sales for the first quarter came in at $1.88 billion, up 20% year over year and roughly in line with our prior expectations. Once again, the company’s next-generation security portfolio posted robust growth.