Is Palo Alto’s Share Price Secure Ahead of Earnings?

The recent cyberattack on US fuel pipeline Colonial has put cybersecurity stocks, including Palo Alto Networks’ [PANW] share price, in the spotlight ahead of earnings announcements.

As organisations consider investing more in securing IT infrastructures to prevent future attacks, stocks like Palo Alto could get a boost in the long term.

Like most technology stocks, Palo Alto’s share price has tumbled in recent weeks. The stock was down 5.5% year-to-date through 17 May, although up 48.7% in the last 52 weeks. As of 17 May’s close, Palo Alto’s share price was trading 16.6% down from its all-time high of $403, at which it peaked on 19 February.

It’s a similar story across the cybersecurity sector. The Global X Cybersecurity ETF [BUG] was down 5.5% year-to-date (through 17 May) but has gained 42.8% since the end of May 2020 — it was 16.6% down from its 52-week high of $403. As of 17 May, the WisdomTree Cybersecurity ETF [WCBR] had dropped 14.8% since launching on 28 January.

Will the revenue growth streak continue?

With the company reporting its third quarter 2021 earnings on 20 May, what can investors expect, and will Palo Alto’s share price rise to a new high in the near future?

Back in February, the Santa Clara-based company provided revenue guidance in a range of $1.05bn and $1.06bn, which would represent a 21% to 22% increase on the $869m posted in the third quarter of 2020.

The second quarter marked the first time the company delivered more than $1bn, with revenue up 25% on the $817m posted in the second quarter of 2020. Data from MacroTrends showed it has never reported a decline in year-over-year quarterly revenue growth since going public in 2012.

According to Zacks Equity Research, the consensus among 13 analysts was for revenue to be the top of the range. Earnings per share, meanwhile, are forecast to be between $1.27 and $1.29. The consensus of 17 analysts was earnings of $1.28 per share.

In a note to clients seen by Seeking Alpha, Deutsche Bank analyst Patrick Colville wrote that the guidance provided on the second quarter 2021 earnings call “looks like a stretch”.

Colville said the company could struggle to meet its annual recurring revenue (ARR) target for the full fiscal year. Having added $189m in ARR in the first and second quarters, it “now must add $310m of ARR in Q3 and Q4”.

Colville does remain bullish on the stock in general, however. He had reiterated a buy rating and increased his price target slightly from $423 to $426. This would be a 27% upswing from its 17 May closing price of $336.82.

Cyber threat detection at the top of customers’ agenda

Ahead of earnings season for cybersecurity and software stocks, Mizuho Securities software analyst Gregg Moskowitz released a note highlighting his top picks, and Palo Alto was one of them. He reiterated a buy rating and boosted a price target of $475, representing a 41% increase from its 17 May close.

“Our recent checks indicate that demand trends have continued to be very good across most areas of software, with digital transformation and/or security projects leading the way,” Moskowitz wrote in the note seen by Barron’s. “That said, software multiples have seen additional pressure in recent weeks, making for a more challenging investing environment at this time.”

Despite any short-term volatility, Palo Alto’s share price could present an attractive play on the cybersecurity sector. A sure sign of its capabilities was that, at the end of last year, Cortex XDR, its security platform, blocked SolarWinds [SWI] hackers from breaching its systems and those using the platform.

On the second quarter 2021 earnings call, Palo Alto revealed that 66% of Fortune 100 companies are users of the Cortex XDR platform. CEO Nikesh Arora said this showed “that automation and advanced threat detection are top of mind for these customers”.

Another factor bolstering the long-term bull case for Palo Alto was the ongoing rollout of 5G infrastructure. The next generation of telecoms will no doubt bring new and multiple threats. As a result, the company expects to provide customers with advanced security offerings, especially when it comes to enterprise networks and securing post-pandemic remote workforces.