Why Palo Alto Networks Shares Are Down 8% Today

Cyber ​​security specialist Palo Alto Networks‘ (PANW 8.77%) Shares were up 8% by 11:25 a.m. ET Tuesday after the company beat analysts’ estimates for sales and earnings last night.

In its fiscal 2024 fourth quarter report ended July 31, analysts forecast Palo Alto to earn $1.41 per share in “adjusted” profit on sales of $2.16 billion. In contrast, Palo Alto reported $1.51 per share on sales of $2.19 billion. Palo Alto also drove higher than analysts expected for Q1 2025.

Palo Alto’s Q4 earnings

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

That’s not great news. It’s also worth noting that when calculated in accordance with generally accepted accounting principles (GAAP) — that is, not “adjusted” to eliminate costs that Palo Alto considers one-time — earnings per share were not $1.51, but only $1.01. Still, the $1.01 per share represented 58% more GAAP profit than Palo Alto earned in fiscal 2023 Q4.

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

Is Palo Alto stock a buy?

This fact was not lost on Wall Street, where nearly two dozen separate investment banks raised their price targets on shares of Palo Alto. (Think that might have something to do with the stock price going up? Me too.)

It also helps Palo Alto’s stock price: Orientation. Citing top-line strength, strong cash generation and non-GAAP operating margin growth, Palo Alto forecast sales would grow 12% or more in Q1 and 13% or more by the end of the year. In particular, management’s forecast for free cash flow implies that it could approach $3.5 billion with $9.1 billion in sales.

What does this mean for assessment? Assuming management achieves these targets, this implies a forward price-to-free cash flow ratio of nearly 35 times. Despite today’s strong earnings, based on low teenage income growth, this still looks too expensive to recommend buying Palo Alto stock.