Did you know that online advertisements are 182 times more likely to deliver malicious content than pornographic sites? The diversity of online threats grows each year. There’s no wonder that businesses want to protect themselves from various malicious content and extensively use software and hardware that enhance their network security.
Recent report
Palo Alto Networks Inc (NYSE:PANW) is one of the companies that plays in the field of network security. The company’s main product is called Next-Generation Firewall, which offers thorough protection against various network threats. Palo Alto Networks Inc (NYSE:PANW) recently reported its quarterly earnings, which gives us a chance to take a closer look at its performance.
Total revenue for the fiscal third quarter grew 54% year-over-year to $101.3 million, but fell short of analysts’ expectations. GAAP net loss for the quarter was $0.10 per share, compared with net income of $0.8 million, or $0.00 per share, a year ago. Non-GAAP earnings were positive and beat analysts’ estimates. The company reported non-GAAP earnings of $0.06 per share compared to the estimate of $0.05 per share.
Would there be more growth?
Palo Alto Networks Inc (NYSE:PANW) trades at 123 times forward P/E. When you see such numbers, you may be sure that investors are anticipating major growth. If growth rates disappoint investors, the stock would suffer. As I mentioned earlier, Palo Alto Networks Inc (NYSE:PANW) fell short of revenue expectations. This would be a short-term negative catalyst for company’s shares. However, we are interested in the long-term prospects of the company.
There are two main things to consider when we think about prospects in network security. The positive one is that digital threats become increasingly complex and varied. In addition to that, companies are more and more dependable on the digital side of their businesses, from customer interaction to enterprise resource management. The negative one is the war on costs throughout the world. The recovery of the world economy remains fragile, and IT spending is pure costs for most businesses.
In this environment, Palo Alto Networks Inc (NYSE:PANW) tries to outgun competitors to get revenue growth. It reported that it has closed a seven-figure deal with a large industrial manufacturer in the U.S., in which it has beaten Check Point Software Technologies Ltd. (NASDAQ:CHKP) and replaced Juniper Networks, Inc. (NYSE:JNPR). In the other seven-figure deal in Japan, Palo Alto Networks has replaced Cisco Systems, Inc. (NASDAQ:CSCO). Palo Alto Networks believes that its product is superior in functionality and performance in comparison with competition, and that the firm is taking away the market share away from the competition.
On its latest earnings call, Cisco Systems, Inc. (NASDAQ:CSCO) stated that it saw a 4% decline in network security revenue, with the maximum weakness coming from content security. Palo Alto Networks’ solution in content security, Content-ID, seems to be doing well at the moment. Cisco gets approximately 12 % of its revenue from network security products. The company is trading at an attractive 13.54 P/E and 11.55 forward P/E and pays a 2.79% dividend.
Network security is not the main source of Cisco’s revenue, and this decline has been outpaced by the growth in other parts of the business, most notably by the data centers and the cloud, which grew 77%. The fact that Cisco is not focused on network security solutions makes it easier for smaller companies like Palo Alto Networks to compete with the giant.
Juniper Networks, Inc. (NYSE:JNPR) also noted disappointing results in security in the first quarter of 2013. I think that this is not a coincidence, and this fact is tied with the Palo Alto Networks growth. Juniper Networks has underperformed the S&P 500 this year, down 8% year-to-date. The stock trades at a 14.07 forward P/E, which looks attractive. Network security accounts for 14% of Juniper’s revenue, while the company’s main focus is on network infrastructure products.
Check Point Software Technologies Ltd. (NASDAQ:CHKP) is the most dangerous competitor with an interesting product, Software Blades. Software Blades are independent security modules that enable a user to select the necessary functions to build a security system. Check Point has recently introduced Threat Emulation, a blade that prevents infection from undiscovered exploits and targeted attacks. Check Point is up around 7% year-to-date and trades at a 13.69 forward P/E. As the company is focused on network security, it is an important rival for Palo Alto Networks.
Bottom line
Palo Alto Networks is operating in an interesting market. However, growth could be muted because of weakness in the world economy and IT spending cuts throughout the world. The company’s sky-high 123 forward P/E demands great growth. If the growth disappoints the market, shares would tank.
On the other hand, the company is gaining market share from the competition. All in all, I would advise to put this stock on your watchlist and wait for the next earnings report. There are big risks, so it’s important to be sure that everything is all right before putting your money on the table.
The article Can This Network Security Company Deliver More Growth? originally appeared on Fool.com.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Check Point Software Technologies and Cisco Systems (NASDAQ:CSCO). The Motley Fool owns shares of Check Point Software Technologies. Vladimir 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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