Even with Palo Alto Networks Inc (NYSE:PANW) trading down substantially after reporting weak earnings the stock is still overvalued. The stock was one of the hottest IPOs in 2012 and has always traded at lofty market multiples.
Palo Alto Networks Inc (NYSE:PANW) is a leading supplier of next generation network security for enterprises, service providers, and government entities to secure their networks. The company forecast up to 45% revenue growth in the next quarter, but is that growth enough to justify outlandish multiples?
Impressive list of deals
Palo Alto Networks Inc (NYSE:PANW) fired off numerous impressive wins during the quarter ended in April. Several deals beat out much larger competitors in Juniper Networks, Inc. (NYSE:JNPR) and Check Point Software Technologies Ltd. (NASDAQ:CHKP) that Palo Alto continues to capture market share on a daily basis.
During the quarter a top 25 customer had to spend $3.2 million with Palo Alto Networks Inc (NYSE:PANW) up from $2.8 million in the previous quarter. The company won deals for a very large industrial manufacturer in the U.S. that beat out Check Point and replaced Juniper Networks, Inc. (NYSE:JNPR) as the new firewall. The company replaced Cisco Systems, Inc. (NASDAQ:CSCO) at one of the largest banks in Japan. In Germany, it beat Check Point for a larger perimeter firewall deal at a leading cable company.
Weak results and guidance
With a stock trading for 10 times revenue expectations in 2013, Palo Alto needs to hit every quarter out of the park in order to grow the stock. Instead, the company reported revenue of $101 million and earnings of $0.06. The revenue number missed analyst estimates and the earnings were basically inline with analyst expectations. These numbers were not exactly good enough to impress the market causing the stock to collapse nearly 11% the next day.
Another concerning point is that guidance was much weaker than expected. The company only expects revenue in the range of $108 million and earnings of $0.06. Both numbers are lower than expectations.
The biggest concern has to be that diluted shares outstanding will jump to potentially 80 million shares as the company reports non-GAAP profits. At the price of $54 prior to earnings, the company had a value of $4.3 billion. This number is significantly higher than those listed at popular financial websites due to the significant amount of stock options included in diluted shares.
Bigger and slower competitors
The two companies specifically called out in the earnings call were Check Point Software Technologies Ltd. (NASDAQ:CHKP) and Juniper Networks, Inc. (NYSE:JNPR). Both companies have substantially higher market caps in the range closer to $10 billion with substantially higher revenue bases. While competitors have other product lines, both have considerably lower growth allowing Palo Alto Networks Inc (NYSE:PANW) to take market share. Juniper Networks, Inc. (NYSE:JNPR) is only expected to grow 3% this year while Check Point Software Technologies Ltd. (NASDAQ:CHKP) is forecasted to hit 4.4% growth.
At this point, the competitors aren’t building the products that would be a threat to Palo Alto, but that fear should always be a concern for investors willing to pay up for this stock. Both companies have substantial cash balances to launch an attack any day so investors need to be diligent.
Bottom line
With the revenue miss and growing market share faster than the firewall market growth rate, investors should be concerned whether enough growth exists for this company to support this market valuation. Even with the 11% selloff the following day, the stock of Palo Alto Networks Inc (NYSE:PANW) continues to trade at a market cap of $3.7 billion or nearly 9 times the current revenue run rate. The company remains a market leader, but investors shouldn’t be willing to pay up for the stock.
Based on these valuations, investors are still overpaying for Palo Alto Networks Inc (NYSE:PANW) even at the closing price for the week that was down nearly 6 points. The company needs a year of strong growth to grow into this valuation before investors should consider a position.
Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends Check Point Software Technologies Ltd. (NASDAQ:CHKP). The Motley Fool owns shares of Check Point Software Technologies Ltd. (NASDAQ:CHKP).
The article Investors Still Overpaying for Palo Alto Networks originally appeared on Fool.com.
Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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