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2 Reasons PANW is Risky and 1 Stock to Buy Instead

PANW Cover Image

Over the past six months, Palo Alto Networks’s shares (currently trading at $167.03) have posted a disappointing 15% loss, well below the S&P 500’s 5.3% gain. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Palo Alto Networks, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Palo Alto Networks Not Exciting?

Even though the stock has become cheaper, we're cautious about Palo Alto Networks. Here are two reasons why you should be careful with PANW and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, Palo Alto Networks grew its sales at a 19.7% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds. Palo Alto Networks Quarterly Revenue

2. Weak Billings Point to Soft Demand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Palo Alto Networks’s billings came in at $2.6 billion in Q1, and over the last four quarters, its year-on-year growth averaged 3%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. Palo Alto Networks Billings

Final Judgment

Palo Alto Networks isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 11.8× forward price-to-sales (or $167.03 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d suggest looking at our favorite semiconductor picks and shovels play.

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