I keep a list of relative strength stocks that are either outperforming its sector peers or the overall market — and preferably both. This year has not been like many others, especially as tech badly lags the overall market. Yet Palo Alto Networks (NASDAQ:PANW) was on that list. As recently as one month ago, PANW stock was hitting new all-time highs.
In a year where energy, basic materials and utilities dominated my relative strength list, Palo Alto Networks was the lone bright spot in tech. It gapped higher in August on strong earnings and while momentum waned in the first quarter, the stock never really broke down. Then earnings ignited it higher in February, setting the stage for a run at new highs. Again, it was bucking all the bearish trends around it.
And then it couldn’t.
Eventually, PANW stock was swept up in the selloff too and despite another strong earnings report on May 19, the stock remains vulnerable. But for an optimist, that’s called opportunity. Here are three reasons why.
Strong Backdrop
Now more than ever, cybersecurity is a vital consideration for every business, government and consumer. The first two — businesses and governments — have become even more focused on cybersecurity lately. That’s as cyber-ransom crimes are on the rise and as geopolitical tensions continue to rise.
As such, it’s no surprise that Palo Alto Networks reported better-than-expected third-quarter earnings on May 19. Revenue rose 30% year-over-year, while earnings came in at $1.79 a share — 11 cents a share ahead of estimates.
As if a top- and bottom-line beat wasn’t enough, guidance came in strong. Management’s fourth-quarter and full-year revenue and earnings outlook came in ahead of analysts’ expectations.
I found what chairman and CEO Nikesh Arora said on the company’s conference call to be quite important:
We continue to see broadening demand for cybersecurity, which is enabling us to grow and invest from a position of strength…we’re not seeing the pressure from an inflation or reduced economic activity perspective.
I don’t want to be way too optimistic, but…you’re seeing way more security awareness and concern more than I’ve ever seen. And we don’t hear about it until there’s a big ransomware discussion publicly, but trust me, they’re going on right now as we speak.
Long-Term Growth
One reason investors can buy PANW stock with some degree of confidence? It has a solid business with strong growth.
Estimates call for 29% revenue growth this year, then 22% to 23% annual growth through 2025. If that comes to fruition, that’s pretty solid and dependable. Further, it would land Palo Alto above the $10 billion revenue mark in 2025.
Earnings forecasts are strong, too. With one quarter to go in its fiscal year, estimates call for 21% growth this year. In FY 2023, those estimates accelerate up to 24% growth. In 2024 — admittedly, almost impossible to predict — estimates call for 22% growth.
If we can get that type of performance, this stock is going higher in the long term regardless of what it does in the short term.
While it seems hard to believe, we’re hearing it right from management. “Way more security awareness and concern…than I’ve ever seen” and “we’re not seeing the pressure” from inflation or reduced economic activity.
These all bode well for Palo Alto Networks and its latest earnings report reiterates just that.
PANW Stock Still Shows Relative Strength
Source: Chart courtesy of TrendSpider
PANW stock may not be displaying relative strength against oil or energy stocks. However, it’s displaying it against its peers, tech stocks in general and against the Nasdaq.
While Palo Alto shares were down 34% at the lows, they are down just 10% YTD. That’s as Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and the Nasdaq are at or near the low and are all down more.
Now just because it’s showing some strength verses its peers, doesn’t mean it can’t come down more. However, the decline gives investors an opportunity to gauge how much risk they want to take.
Aggressive bulls may consider now a good time to start accumulating — not “backing up the truck” — on PANW stock. After all, it just reported strong results and is trying to rally. However, more conservative investors may wait for more downside.
Specifically, they may wait for a pullback back into the $450 area. Others may consider waiting for a retest of the low near $420. Finally, the most conservative yet precise investors may wait for a potential opportunity to buy near $400 — the retest of a major breakout area.
— Bret Kenwell
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Source: Investor Place