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The end of May was especially busy for Palo Alto Networks (NYSE: PANW). Besides reporting on its fiscal 2019 third quarter, the cybersecurity company announced two new acquisitions: container security outfit Twistlock for $410 million in cash, and serverless application security start-up PureSec for an undisclosed sum.
Palo Alto continues to grow by leaps and bounds, and is using its success to scoop up fast-growing peers, to extend its lead in protecting all sorts of business operations from those with nefarious intentions. Investors were ho-hum on the news, though, setting up a buy-the-dip situation for those willing to take a longer-term view.
The year so far in review
Palo Alto Networks' revenues rose 28% during the three months ended April 30, to $727 million. Adjusted earnings grew 26% to $1.31. Neither headline number is anything to complain about, but both were nevertheless a deceleration from the growth rates posted so far during the company's 2019 fiscal-year tour.
| Metric | Nine Months Ended April 30, 2019 | Nine Months Ended April 30, 2018 | Change (YoY) |
|---|---|---|---|
| Revenue | $2.09 billion | $1.62 billion | 29% |
| Gross profit margin | 71.8% | 71.5% | 0.3 ppt |
| Operating expenses | $1.55 billion | $1.28 billion | 21% |
| Earnings (loss) per share | ($0.65) | ($1.42) | N/A |
| Adjusted earnings per share | $3.98 | $2.84 | 40% |
YoY = year over year; ppt = percentage point. Data source: Palo Alto Networks.
Though momentum cooled, the upshot is that the third quarter exceeded management's guidance given a few months prior. Palo Alto has a history of setting a low bar for itself, and that could be the case again headed into the fourth quarter. Revenue was forecast to be up 20% to 21% year over year, and adjusted earnings up just 10% to $1.41. Granted, the earnings guidance includes a negative $0.12-per-share impact from the acquisition of Demisto and the proposed takeovers of Twistlock and PureSec, and another $0.02 impact from U.S.-China trade-war tariffs. But the steep slowdown in guidance seems to be what has investors fretting.
Image source: Getty Images.
Why this is one cheap stock
Palo Alto is benefiting from the growing importance of cybersecurity around the globe, and the advent of cloud computing is making securing critical operations even more complicated for businesses. Thus, its stock could have years' worth of double-digit growth ahead as global enterprises look to keep themselves safe. Add in the company's proclivity for making strategic takeovers, and there are a lot of reasons to like Palo Alto's prospects.