Why Palo Alto Networks Stock Popped 8% Today

Cybersecurity specialist Palo Alto Networks' (NASDAQ:PANW) stock soared 8% through 11:25 a.m. ET Tuesday after the company beat analyst forecasts for sales and earnings last night.

Heading into its report for the fiscal fourth quarter of 2024, ended July 31, analysts forecast Palo Alto would earn $1.41 per share in "adjusted" profit on sales of $2.16 billion. Instead, Palo Alto reported $1.51 per share, and sales were $2.19 billion. Palo Alto also guided higher than analysts expected for Q1 2025.

Palo Alto's Q4 earnings

Not all the news was good. Palo Alto said Q4 2024 sales came in 12% stronger than a year ago. However, sales growth for the full fiscal year was 16%, so that would mean sales slowed in Q4. Also, Palo Alto's adjusted net income grew only 5%, even slower than sales.

That's not great news. It's also worth noting that, when calculated according to generally accepted accounting principles (GAAP) -- which is to say, not "adjusted" to take out costs that Palo Alto considers one-time -- per-share earnings were not $1.51, but only $1.01. Still, $1.01 per share was 58% more GAAP profit than Palo Alto earned in fiscal Q4 2023.

And that number was a whole lot better than Palo Alto's earnings growth rate.

Is Palo Alto stock a buy?

This fact wasn't lost on Wall Street, where nearly two dozen separate investment banks have raised price targets on Palo Alto stock. (Think that might have something to do with the stock price rising? So do I.)

Also helping Palo Alto's stock price: Guidance. Citing top-line strength, strong cash generation, and growth in non-GAAP operating margin, Palo Alto predicted sales will rise 12% or more in Q1, and 13% or more by year-end. In particular, management's forecast for free cash flow implies it could approach $3.5 billion on $9.1 billion in sales.

What's this mean for valuation? Assuming management hits those targets, it implies a forward price-to-free-cash-flow ratio of nearly 35x. Despite today's strong earnings beat, on low-teens revenue growth, that still seems too expensive to recommend buying Palo Alto stock.

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Rich Smith has positions in Palo Alto Networks. The Motley Fool has positions in and recommends Palo Alto Networks. The Motley Fool has a disclosure policy.