To the Moon? What is going on with PANW?

Software company Palo Alto Networks, Inc. (PANW) stunned Wall Street today as it surged to $569.39, marking a 12.1% change compared to the S&P 500 and the Nasdaq indices, which logged -0.1% and 0.2% respectively. Over the last year, Palo Alto Networks, Inc. shares have outperformed the S&P 500 by 22.7%, with a price change of 15.0%. PANW is currently -9.8% below its average analyst target price of $631.23, which implies there is more upside for the stock. As such, the average analyst rates it at buy.

As of the second quarter of 2022, the average Price to Earnings (P/E) ratio of US technology companies is 20.64, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

Palo Alto Networks does not release its trailing 12 month P/E ratio since its earnings per share of $-3.98 were negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for PANW of -143.2. Based on the company's positive earnings guidance of $9.26, the stock has a forward P/E ratio of 61.5.

Unlike earnings, gross profit margins are the company's revenue minus the cost of goods only, and don't take into account taxes and overhead. Analyzing gross profit margins as opposed to net (operating) margins gives a better picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof. PANW has gross profit margins of 69.3%, which indicates that it potentially benefits from a sustained competitive advantage over its peers, allowing it to maintain highly profitable pricing structures.

The revenues and earnings related to sales are only a part of the financial puzzle of large corporations, which have many costs and expenses arising independently from their core business: cost of maintaining debt, rent payments, return on capital investments, depreciation, etc. When all of these separate cashflows are taken into account, we are left with the company's levered free cashflow, which for Palo Alto Networks, Inc. is $1,725,487,488. This represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cashflow, PANW is in a position to do either -- which can encourage more investors to place their capital in the company.

Value investors often analyze stocks through the lense of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the second quarter of 2022, the mean P/B ratio of the technology sector is 5.39, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Palo Alto Networks’ P/B ratio indicates that the market value of the company exceeds its book value by a factor of 168.0, so it's likely that equity investors are over-valuing the company's assets.

Considering the above, Palo Alto Network is likely a fairly valued stock. Despite its negative P/E ratio and inflated P/B ratio, it has excellent profit margins, an analyst consensus of some upside potential, and strong cashflows. We hope you enjoyed this basic overview of PANW's fundamentals. Make sure to check out and subscribe to our free newsletter!

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.