Palo Alto Networks Stock Dips After Solid Quarter: Should You Buy?

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Palo Alto Networks Stock Dips After Solid Quarter: Should You Buy?

Cybersecurity leader Palo Alto Networks (NASDAQ:) posted a solid fiscal third quarter for the ******* ended April 30, but investors were not all that impressed, as the stock price opened about 7% lower on Wednesday.

Is this a buying opportunity for the leading enterprise cybersecurity stock?

Let’s look at the quarterly results first. Palo Alto Networks generated $2.3 billion in revenue in the quarter, up 15% year-over-year. That eked past estimates of $2.28 billion.

Net income fell 6%, however, to $262 million, or 39 cents per share. However, the metric that analysts follow because it eliminates one-time expenses/items and can be a more accurate gauge, adjusted net income, was up 23% to $561 million. Adjusted earnings were 80 cents per share, which beat estimates of 77 cents per share.

“We again delivered strong top-line results within our profitable growth framework, as we continue to see our business scale well across the P&L,” Dipak Golechha, chief financial officer of Palo Alto Networks, said. “We look forward to executing against our targets as we close fiscal year 2025.”

Cost of Revenue Rises

Palo Alto Networks makes most of its revenue, about 80%, from subscriptions and support services for its cybersecurity software products. So, what it calls Next Gen Security ARR (annual recurring revenue) is a key metric because it tracks the annual revenue from all of its contracts.

In the quarter, ARR grew 34% to $5.1 billion, but that is below the growth rate reported in each of the previous two quarters. The ARR grew 37% in Q2 and 40% in Q1.

The other key metric is Remaining Performance Obligations, or RPO, which tallies the value of contracts not yet fulfilled. RPO grew 19% year-over-year to $13.5 billion, but that was down from a 21% growth rate the previous quarter.

These results may have partially been a reason

Also, the cost of revenue rose 20% in the quarter to $619 million, outpacing revenue growth. Thus, its gross profit margin ticked down to 72.9%, from 73.5% and 74.1% over the two previous quarters. While high, this may have been another reason for the selloff.

But neither was likely the main reason.

A Bit Too Expensive

For the full fiscal year, Palo Alto Networks expects ARR to be in a range between $5.52 billion to $5.57 billion, representing 31% to 325 year-over-year growth. RPO growth is targeted at $15.2 billion to $15.3 billion, representing 19% to 20% year-over-year growth.

Revenue is slated to fall between $9.17 billion to $9.19 billion, up 14% from the previous year, while net income is targeted for $3.26 to $3.28 per share. This is down from last year and below initial projections, but in line with estimates.

Further, the adjusted operating margin is expected to be in the range of 28.2% to 28.5%, which is higher than projections at the beginning of the year.

The Q4 guidance was also roughly in line with estimates.

The larger issue for investors is likely its sky-high valuation. It is trading at 109 times earnings, and 50 times forward earnings, and given the slowing earnings growth projections, it looks unsustainable.

Palo Alto Networks stock has been steadily moving up over the past few years, and has a bright future, it is just too expensive to consider right now, which is probably why investors were selling Wednesday.

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