Palo Alto Networks (NASDAQ: PANW) stock sat on a wall. Palo Alto Networks had a great fall (dropping 28.5% after earnings last month). Can all the king's horses and all the king's men, bid Palo Alto Networks stock back up to $350 again?
That's the question facing investors today, as equity researcher Redburn Atlantic raises its price target on Palo Alto stock to $350. That's about what the stock cost right up until Palo Alto reported fiscal Q2 2024 earnings on Feb. 21 and warned that its cybersecurity business is slowing.
Is Palo Alto stock a buy?
Q2 2024 results were great -- sales jumped 19% year over year, and profits were up nearly 19-fold. But then Palo Alto CEO Nikesh Arora spooked investors with talk of a new "platformization and consolidation" strategy that could slow sales growth to 13% year over year in Q3, and reduce billings growth to 2%.
Redburn analyst Nina Marques isn't scared though. Near-term, "platformization" may slow Palo Alto's growth rate, as the company offers customers discounts to sign up for bundled services. But in the long term, she sees platformization delivering "massive returns" for Palo Alto as the company leverages artificial intelligence to enhance cybersecurity across its products. Yes, Marques says Palo Alto is an AI stock.
So how might this play out in practice? At a current market cap of $92 billion and a projected long-term growth rate of 18.5%, I'd like to see Palo Alto generate about $5 billion in free cash flow to justify its current valuation -- but most analysts don't see that happening before 2027. This year, the stock is only expected to generate $3.1 billion in free cash flow, which tells me Palo Alto is probably overpriced even at the $281 it currently costs. It's definitely not worth $350 a share, unless the company grows a whole lot faster than most analysts think it will.
Long story short, Redburn is wrong on this one. Palo Alto may be a fine company, but its stock isn't going to $350 anytime soon.
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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.
