Why Key Analyst Sees 40% Upside in Palo Alto Networks

Palo Alto Networks Inc. (NYSE: PANW) is seen as a next-generation leader in the enterprise security space, but so far 2016 has been off to a slow start with the stock down over 15%. As a result, one key independent analyst firm stayed positive on the stock but cut its target price by roughly 10%.

Argus maintained a Buy rating for Palo Alto Networks but lowered its price target to $205 from $227, implying upside of roughly 40% from current prices. While superior technology is at the core of Palo Alto’s value proposition, the firm also expects growth to be driven by market share gains, sales of additional products to existing customers, and international expansion.

Argus also lowered its fiscal 2016 earnings per share (EPS) estimate to $1.63 from $1.72 and its fiscal 2017 forecast to $2.66 from $2.70. The long-term earnings growth rate forecast is 50%, from a low base. Consensus estimates from Thomson Reuters call for $1.68 in EPS in fiscal 2016 and $2.56 in EPS in fiscal 2017.
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In the report Argus detailed:

Palo Alto has a roughly 10% market share, but is posting more than 50% revenue growth and more than 60% billings growth. It is currently seeing its fastest growth in the U.S., though it should be able to develop its international sales force over time. We also like management’s balanced focus on revenue growth and increased profitability, and note that the company could become an acquisition target for a larger tech player, much the way that McAfee was acquired by Intel and SourceFire by Cisco.

While Palo Alto stock trades at lofty multiples, the company is growing substantially faster than most competitors, suggesting that it is both taking market share and generating more revenue from existing clients.

The company added 2,000 new customers in the fiscal second quarter, increasing its customer base to 30,000. Palo Alto expects continued strong demand for its services. The computing network threat environment has never been more toxic, with numerous well-publicized security breaches of large businesses, as well as government agencies. Industry tracker IDC expects the enterprise security market, including both network and endpoint security, to grow at a 7% compound annual rate, to $19.5 billion, through 2018. However, current market growth rates appear to be in the low to mid-teens.

Shares of Palo Alto Networks were trading down 1.6% to $146.21 on Wednesday, with a consensus analyst price target of $192.86 and a 52-week trading range of $111.09 to $200.55.