Palo Alto Gains With Analysts Reassured on Business Strategy

(Bloomberg) -- Palo Alto Networks Inc. shares jumped on Thursday as the company’s first analyst day in two years reassured Wall Street about the networking company’s business transition to a cloud- and subscription-based model.

The event Wednesday came on the same day as Palo Alto’s fourth-quarter results. While the report came in ahead of forecasts, it also gave a first-quarter outlook that was below expectations. However, Maxim Group brushed off this as management being conservative.

Analysts wrote that the analyst day presentation validated Palo Alto’s strategy. Citi wrote the stock could go from being a controversial choice to an “obvious” one.

Shares gained as much as 8.7% in Palo Alto’s biggest one-day pop since February. At current levels, the stock remains about 15% below a record hit earlier this year.

Here’s what analysts are saying:

Morgan Stanley, Keith Weiss

The inflection in growth in the company’s cloud security platform “validates the aggressive expansion strategy and forms a strong foundation for management’s 20%+ 3 year growth target.”

Affirms overweight rating and $290 price target. Writes that “durable” free-cash-flow growth of more than 20% isn’t reflected in the stock price.

Citi, Walter Pritchard

This was “another strong quarter” that “showed growth ahead of peers across the board.”

Palo Alto “threads the needle well,” and the stock “can start to move from ‘controversial’ to ‘obvious.’”

Uncertainty surrounding numbers is “largely off the table,” and the valuation is reasonable.

Buy rating, $247 price target.

Maxim Group, Nehal Chokshi

Services revenue “continues to trend strongly” and growth in Next-Gen security products is impressive.

While the first-quarter revenue outlook was slightly lower than expected, this is likely due to Palo Alto being conservative.

Buy rating, price target raised to Street-high $316 from $304.

Wells Fargo Securities, Philip Winslow

The results and analyst day reinforce the thesis that Palo Alto can deliver “durable, profitable growth.”

The company’s security platform is “well-positioned to enable the company to continue to gain share in the IT security market.”

Palo Alto’s strategy to transition toward cloud- and subscription-based offerings could create “a small headwind” to its long-term deferred revenue and reported cash flow. However, expects that “investors’ concerns regarding the potential impact of shortening duration were much higher.”

Outperform rating, $275 price target.

Cowen, Nick Yako

New long-term targets “provide more clarity into ongoing transition,” but include both positives and negatives. There is less uncertainty, “which is a net positive,” but the business transition “will take time and is not without its challenges.”

Market-perform rating, $205 price target.

What Bloomberg Intelligence Says:

Palo Alto’s “reliance on appliance product sales for its core firewall and lack of an annual recurring revenue (ARR) model remain execution risks.”

- Analyst Mandeep Singh

- Click here for the research

To contact the reporter on this story: Ryan Vlastelica in New York at rvlastelica1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Jennifer Bissell-Linsk

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