Summary
- PANW topped revenue and EPS estimates in 4Q FY2024, but its growth trajectory significantly slowed, driven by weak bookings and billings growth.
- The company failed to achieve the Rule of 40 for the first time since FY2022, despite a slight improvement in operating margin, as it faces increasing competition.
- Management forecasts a continued deceleration in revenue growth but a slight improvement in operating margin in FY2025, leading to a low single-digit EPS growth outlook.
- The stock’s valuation multiples are significantly higher than its historical averages and peers with stronger growth outlooks, as it continues to trade at 12.3x EV/Sales forward and 56x non-GAAP P/E forward, justifying a sell rating.
Investment Thesis
Palo Alto Networks, Inc. (NASDAQ:PANW) topped both revenue and non-GAAP EPS estimates in 4Q FY2024, which initially triggered a nearly 7% post-earnings rally. However, the stock quickly reversed course in the following trading days, nearly erasing all the gains. Despite a better-than-expected quarter, I believe the stock has limited upside as its top-line growth continues to decelerate. In my previous analysis, I initiated a hold rating on the stock due to the company’s billings facing a significant slowdown, with the potential risk of falling below the Rule of 40 in the coming quarters. My concerns have been validated, as PANW’s total revenue growth plus non-GAAP EBIT margin is now 39%, and total billing growth has dropped significantly on a sequential basis. Given that the stock is still trading at a premium valuation of 56x forward non-GAAP P/E, I have downgraded my neutral rating to a sell.
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