Palo Alto Networks Earnings: Strong Results Amid a Challenging Macro Environment

Palo Alto Networks Stock at a Glance

• Fair Value Estimate: $225
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide

Palo Alto Networks Earnings Update

We are raising our fair value estimate to $225 from $200 for wide-moat Palo Alto Networks PANW stock after the firm reported yet another stellar quarter with strong top- and bottom-line results. Amidst a dreary macro backdrop, we continue to be impressed by Palo Alto’s strong execution and robust sales pipeline, which has helped insulate the firm’s financials from macro-induced contractions.

Palo Alto’s sales clocked in at $1.721 billion, up 24% year over year and just shy of the high end of management’s prior guidance. Much like previous quarters, subscription and support sales spearheaded this strong showing, growing 29% year over year to $1.333 billion. Palo Alto’s next-generation security offerings also continued to gain traction, with next-gen security’s annual recurring revenue growing 60% year over year to $2.574 billion. This rapid expansion is a result of Palo Alto’s investments in high-growth cybersecurity areas to grow its overall business, as firewall demand is expected to wane in the long term.

Forward-looking indicators like billings and remaining performance obligations also remained healthy, growing 26% and 35% year over year, respectively. We continue to highlight the strength in these indicators despite the macroturbulence that has made many technology firms see contractions in these metrics. We tie this strength to the mission-critical nature of Palo Alto’s offerings, as well as the firm’s efficient sales strategy that has allowed it to grow its business despite the macro-induced elongated sales cycles.

On the profitability front, Palo Alto reported adjusted EPS of $1.10, above the high end of management’s prior guidance. Similarly, adjusted operating margins also remained strong, expanding 540 basis points year over year to 23.6% as the firm balances financial discipline with investments in high-growth cybersecurity end markets.