Wall Street’s enthusiastic response to Palo Alto Networks’ strong earnings Tuesday reinforced our belief that the cybersecurity stock is overextended. Shares rose more than 8% to nearly $372 each in afternoon trading after Palo Alto posted better-than-expected fourth-quarter fiscal 2024 earnings and revenue late Monday, offering a bullish outlook. The roughly 27% gain since Aug. 5 puts the stock just a few dollars below its record close of nearly $377 on Feb. 9, offsetting the fiscal second-quarter disaster that sent shares to their lowest level of 2024 on Feb. 21. Jim Cramer called the recent move “parabolic.” That doesn’t mean he’s any less bullish on Palo Alto in the long term, though. In fact, the company raised its price target to $380 per share from $360 late Monday. We reiterated our 2 rating on the stock in recognition of its stellar move. Jim has suggested in recent sessions that taking some profits might not be a bad idea. Here’s an excerpt from our club’s analysis of Palo Alto’s numbers: RPO (Remaining Performance Obligation) guidance was a bit soft. But that was more than offset, in our view, by management’s better-than-expected sales, earnings, and recurring revenue forecasts for both the current quarter (1QFY25) and the full fiscal year 2025. To deemphasize billings, which represent the total dollar amount billed in a given period, and put more emphasis on RPO, which represents the total value contracted during the quarter, management has stopped providing billings guidance altogether. The team now also provides an overview of annual recurring revenue (ARR). PANW YTD mountain Palo Alto Networks YTD Wall Street analysts echo our bullish sentiment. According to FactSet data, at least two dozen research firms — including Wells Fargo, Morgan Stanley, JPMorgan, and Goldman Sachs — have raised their price targets on Palo Alto. Wells Fargo, in particular, rose to $416 per share from $385 — noting that Palo Alto’s “platform” offerings continue to “gain momentum.” Palo Alto reported more than 1,000 platform customers in the fiscal fourth quarter, adding more than 90 since the previous quarter. Management also reiterated its goal of reaching $15 billion in annual recurring revenue in fiscal 2030. Wells Fargo estimated it would “need 2,500-3,500 platform customers, or an average of 335 new customers added annually, to reach the midpoint, which is roughly what they added in fiscal 2024.” During a post-earnings call, CEO Nikesh Arora highlighted Palo Alto’s progress with platforms as well. “I know there was a lot of confusion about our platform strategy six months ago,” Arora said, in a possible reference to the post-earnings selloff after management announced the shift in late February. “All I can say is I wish we had started on this path sooner. The amount of interest and activity around it has certainly been encouraging and shows promise,” he added. Morgan Staley believes Palo Alto will continue to see revenue growth. “We believe the bottom has now passed and we see revenue growth accelerating throughout fiscal 2025,” the analysts said in support of raising the price target to $390 from $360. To be sure, not everyone on Wall Street is convinced Palo Alto has significant growth ahead. UBS analysts, who reiterated their hold rating on the stock, said it was “hard to justify the upside here,” given the low-to-mid growth guidance for RPO. The analysts increased their price target to $355 per share from $345. But that represents about a 5% decline from current levels. (Jim Cramer's Charitable Trust is a PANW long-term mutual fund. See here for a complete list of stocks.) As a subscriber to CNBC's Investment Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his Charitable Trust portfolio. If Jim talks about a stock on CNBC, he waits 72 hours after issuing a trade alert before executing the trade. The Investment Club information above is subject to our Terms and Conditions and Privacy Policy, as well as our Disclaimer. No fiduciary obligation or duty is, or is created, by your receipt of any information provided in connection with the Investment Club. There is no guarantee of a specific outcome or profit.
Nikesh Arora of the United States on the first hole during the third round of the Alfred Dunhill Links Championship at The Old Course on October 2, 2021 in St. Andrews, Scotland.
David Cannon | David Cannon Collection | Getty Images
Wall Street reacted enthusiastically Tuesday to strong earnings from Palo Alto Networks Reinforces our belief that cybersecurity stocks are overextended.
