The news broke after hours on Friday evening. The stock, which had already hit a record high during the regular session that day, traded even higher later on.
As part of the S&P quarterly index rebalancing event that takes place ahead of the opening bell on Tuesday, June 20, cyber security leader (some might say "best in class") Palo Alto Networks ( PANW) will be added to the S&P 500, replacing Dish Network ( DISH) , which will head down to the S&P SmallCap 600.
Why is this a big deal? In addition to the increased visibility and prestige, this forces capital that tracks the S&P 500 to, in some cases by mandate, invest in and track PANW.
Palo Alto has been hot of late, reporting fiscal third-quarter financial results that showed margin expansion while also dishing out solid guidance. The company has also been a beneficiary of the market-wide run into all things generative AI-related.
Palo Alto was an early leader in the integration of machine learning and ultimately advanced AI capabilities into providing cybersecurity services to its clientele. The company is said to analyze some 750M new and unique objects every day to train its artificial intelligence algorithms. This helps the company detect a rough 1.5M unique attacks every day.
The Guidance
For the current (fiscal fourth) quarter, Palo Alto projected total billings in the range of $3.15B to $3.2B (+17% to 19%). Total revenue is now seen at $1.937B to $1.967B, leaving the midpoint good for growth of 25% to 27%.
The company also posted expectations for adjusted EPS of $1.26 to $1.30, which was well above the $1.18 or so that Wall Street had been looking for. This projection, based on implied margin expansion, had been a primary reason for the stock's late May/early June rally. Now, this S&P 500 news.
For the full fiscal year, total billings are expected to print at $9.18B to $9.23B, representing year-over-year growth of 23% to 24%. The company sees total revenue of $6.88B to $6.91B, which would be good for growth of 25% to 26%. Additionally, for the full year, Palo Alto sees adjusted EPS of $4.25 to $4.29, which is far above the $3.99 that Wall Street had in mind.
Fundamentally...
For that fiscal third quarter, Palo Alto generated $432.1M in operating cash flow. Out of that came $31.2M in the purchase of property and equipment and $18.9M in business acquisitions net of cash acquired, bringing Palo Alto's free cash flow to $382M. The company did not repurchase any common stock during the quarter and does not pay out a dividend, so it's truly free.
Taking a look at the balance sheet, the company ended that quarter with a cash position of $3.958B and current assets of $6.414B. Current liabilities added up to $8.641B, including $3.682B in convertible senior notes.
On the surface, this current ratio of 0.74 admittedly looks awful. Then, as I reminded readers in May, the investor spots the $4.147B entry for deferred revenue. Deferred revenue is not a financial liability at all, but one of goods, labor or services owed for customers who paid in advance. Once the work is done, the revenue can then be recognized as ordinary. Hence, this distorts metrics like current or quick ratios, making them appear less healthy than they really are. In this case, almost half of current liabilities are actually work/services that have already been paid for.
Total assets amounted to $14.171B, including $3.268B in goodwill and other intangibles. At 23.1% of total assets, that's not a problem. Total liabilities less equity came to $12.938B. This included no long-term debt and another $3.943B in longer-term deferred revenue. That brought total deferred revenue to $8.09B, which made up 62.5% of total liabilities.
Now, my friends, this is a problem that companies would line up around the block to wait for. This is one healthy balance sheet. The only issue I see at all is the short-term nature of those convertible notes, which means that Palo Alto will have to handle that item this year.
Breakout!
Two weeks ago, I pointed out the stock's December through February cup-with-handle pattern that produced a failed breakout. Astute readers will recall that we had a $220 target on PANW coming out of that pattern.
The stock ran out of juice at $203. We then pointed to that much smaller cup-with-handle pattern that had developed (April into May) with a pivot of $201. That put my target at $232.
We were concerned at that time that the shares might stall and have to fight to retain their 50-day simple moving average (SMA).
Take a look at this:
That was no problem at all as the shares took off, gaining 14.5% from May 24 when I wrote that piece through Friday's closing price. I see PANW trading with a $227 handle (+4.8%) Monday morning.
At this point, I think I can wait on my target. That 50-day SMA, which is up to $194 and will certainly be higher than that now, becomes my panic point. A break of that rising line as support would be where I run for the hills. (Not likely right now.) Truth is, no way in heck I sell these ahead of June 20 anyway.
As for the next target, let's get to $232 first, but the shares will need to consolidate and almost certainly will once all of the forced capital is moved in two weeks time. That's when we likely see a new pattern and can create a valid "next" price target. One thing is certain, we'll sell a partial at target when breached because that is how we roll. That is all we'll sell though.
