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Palo Alto Networks's (NYSE:PANW) Q3 Sales Top Estimates, Next Quarter Growth Looks Optimistic


Adam Hejl 2021/05/20 4:11pm


Cybersecurity provider Palo Alto Networks (NYSE:PANW) reported strong growth in the Q3 FY2021 earnings announcement, with revenue up 23.5% year on year to $1.07 billion. Palo Alto Networks made a GAAP loss of $145.1 million, down on its loss of $74.8 million, in the same quarter last year.

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Palo Alto Networks (NYSE:PANW) Q3 FY2021 Highlights:

  • Revenue: $1.07 billion vs analyst estimates of $1.05 billion (1.51% beat)
  • EPS (non-GAAP): $1.38 vs analyst estimates of $1.29 (7.38% beat)
  • Revenue guidance for Q4 2021 is $1.17 billion at the midpoint, above analyst estimates of $1.16 billion
  • Gross Margin (GAAP): 69.2%, in line with previous quarter
  • Updated valuation: Palo Alto Networks is up at $350 and now trades at 8.3x price-to-sales (LTM), compared to 8.7x just before the results.

"The work-from-home shift earlier in the year and recent cybersecurity issues have increased the focus on security. Coupled with good execution, this has driven great strength across our business," said Nikesh Arora, chairman and CEO of Palo Alto Networks.

Leader In Cybersecurity

Founded in 2005, Palo Alto Networks (NYSE:PANW) makes hardware and software cybersecurity products that protect companies from cyberattacks, breaches and malware threats. The company started by offering traditional on-premise hardware firewalls and while that is still a big part of their business, it has in the last couple of years been successfully transitioning into offering cloud-based software-as-a-service products.

As you can see below, Palo Alto Networks's revenue growth has been strong over the last twelve months, growing from $869.4 million to $1.07 billion.

Palo Alto Networks Total Revenue

This quarter, Palo Alto Networks's quarterly revenue was once again up a very solid 23.5% year on year. But the growth did slow down a little compared to last quarter, as Palo Alto Networks increased revenue by $57 million in Q3, compared to $70.9 million revenue add in Q2 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning. Palo Alto Networks has been doing well, but there are others doing even better. For example, we found a small company started by ex-Google engineers that is selling software to banks and has been growing revenue 90% year on year. On top of that, it is profitable, up more than 200% since the start of the year and still trades at a discount to its peers. You can find it on our platform for free. Click here to get early access.

Hardware With Almost Software Margins

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. While majority of Palo Alto’s revenue these days comes from selling software, a significant part of their business is still manufacturing hardware firewalls, and that type of business has higher costs than pure software.

Palo Alto Networks Gross Margin (GAAP)

Palo Alto Networks's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 69.2% in Q3. That means that for every $1 in revenue the company had $0.69 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and we would like to see it start improving.

Key Takeaways from Palo Alto Networks's Q3 Results

With market capitalisation of $32.6 billion and more than $2.94 billion in cash, the company has the capacity to continue to prioritise growth.

Palo Alto Networks topped analysts’ revenue expectations this quarter, even if just narrowly. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Zooming out, we think this was a decent quarter. Palo Alto Networks seemed like a decent growth stock even before these results, and we'd argue these results confirmed that view.

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The author has no position in any of the stocks mentioned.