Wunderlich Weighs In On Palo Alto Networks Guidance: 'More Leverage Than Meets The Eye'

Wunderlich said Palo Alto Networks Inc PANW has provided a conservative outlook for FY17 given the increased leverage from higher margin subscription revenues and deferred commission project that should boost EPS by $0.25.

"As such, we believe there is upside to updated FY17 estimates. PANW remains a top pick for us in cyber security," analyst Ryan MacDonald wrote in a note.

Palo Alto's fourth-quarter report saw revenue topping consensus estimates while EPS was in line. The top line was driven by strong subscription growth and an above-consensus product revenue number, which has been a focus for investors.

Related Link: Goldman Sachs Still Bullish On Palo Alto

The company issued a first-quarter revenue guidance range of $396 million–$402 million, below consensus of $401.9 million at the midpoint as it expects product revenue growth to decelerate to the 12–13 percent range in FY17 and recurring services revenues to grow at least 50 percent year-over-year in FY17. EPS guidance was in the range of $0.51–$0.53, also below consensus at $0.56.

For FY17, the company guided non-GAAP EPS to a range of $2.75–$2.80 versus consensus of $2.65. MacDonald raised his FY17 revenue estimate to $1.8321 billion from $1.8036 billion and hiked his EPS estimate to $2.79 from $2.62.

MacDonald reiterated his Buy rating and $190 price target on Palo Alto shares. The $190 price target assumes that the shares trade at 18.8x his FY17 cash flow estimate of $928.5 million, a discount to the next-gen security group mean of 34.1x.

"We believe PANW market share gains, balanced revenue and operating margin approach to growth should drive significant price appreciation," MacDonald added.

Shares of Palo Alto Networks closed Tuesday's trading at $143.45. In the pre-market hours Wednesday, they fell 4.75 percent to $136.63, and at time of writing, they were down 7.67 percent at $132.53 within the first two hours of regular trading.

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