Guggenheim Reiterates Sell Rating on Palo Alto Networks (PANW)
Guggenheim analyst John DiFucci reiterated a Sell rating and $130.00 price target on Palo Alto Networks (NASDAQ: PANW)
The analyst comments "Palo Alto Networks reported F2Q results largely in line with our preview, "Fair is Foul and Foul is Fair", showing little upside to the company’s chosen top-line metrics (NGS ARR, RPO, Revenue), but two metrics surprised us. Cash flow was much weaker than consensus, and we estimate that Total New ARR (our preferred metric to measure the momentum of the entire business) likely declined for the sixth consecutive quarter against the easiest comp ever, portending further moderating revenue growth. No other company in our coverage universe has seen such a falloff in new business growth. Guidance was also largely in line with our preview, as F3Q and FY25 guidance for NGS ARR and RPO was maintained, and annual revenue was raised by about the modest F2Q beat. On a positive note, management said that FCF margin guidance would remain at 37+% through FY27 as the company uses AI and other means to increase efficiency. However, we suspect revenue growth in FY26 (and perhaps FY27) will continue to moderate given the declining Total New ARR over the last year and a half, thereby affecting the absolute value of FCF. To be clear, our contention is not that PANW is a bad company. On the contrary, it’s a great company, and credit should be given to this team who built a much more relevant presence in the market than it would have had it remained primarily a firewall appliance vendor — to become the largest pure-play security vendor in the world. At the same time, what is it worth? It trades at 18x EV/NTM Recurring Revenue and 39x EV/NTM FCF for a low-teens grower with moderating growth that will likely continue as foretold by declining Total New AR. Yes, there may be others (FTNT) that trade at a similar multiple (17x EV/NTM Recurring Rev and 37x EV/NTM FCF) on the back of the hopes of the temporary benefit of a future product cycle, but that seems like a weak pitch to defend PANW. We remain Sell with a $130 price target."
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Shares of Palo Alto Networks closed at $201.88 yesterday.