PANW shares rally 5% following small top and bottom line beat; Will NGS growth be enough to support rich valuation?

Palo Alto Networks (PANW) delivered strong results in its fiscal Q4, surpassing both revenue and earnings expectations. The company reported adjusted EPS of $1.51, beating the consensus estimate of $1.41, while revenue grew 12% year-over-year to $2.19 billion, exceeding the expected $2.16 billion. However, product revenue fell 5.3% year-over-year to $480.5 million, missing the consensus estimate of $493.6 million, while subscription and support revenue grew by 18% to $1.71 billion, slightly above the expected $1.67 billion. A key metric, deferred revenue, increased 19% year-over-year to $5.54 billion, although this was slightly below the $5.64 billion estimate.

Palo Alto Networks provided optimistic guidance for Q1 FY2025, forecasting revenue between $2.10 billion and $2.13 billion, in line with analyst expectations of $2.11 billion. The company also guided for adjusted EPS in the range of $1.47 to $1.49, above the consensus estimate of $1.43. For the full fiscal year 2025, PANW expects revenue to be between $9.10 billion and $9.15 billion, with adjusted EPS ranging from $6.18 to $6.31, both of which are slightly ahead of current analyst estimates.

A significant highlight for the quarter was the growth in Next-Generation Security (NGS) Annual Recurring Revenue (ARR), which grew 43% year-over-year to $4.2 billion, reflecting the company’s successful execution of its platformization strategy. Additionally, the remaining performance obligation (RPO), which represents future revenue under contract, grew 20% year-over-year to $12.7 billion, showcasing strong demand for the company’s services.

The company also announced that its board of directors authorized an additional $500 million for share repurchases, bringing the total remaining authorization to $1 billion, set to expire on December 31, 2025. This move demonstrates confidence in the company’s future prospects and commitment to returning value to shareholders.

Palo Alto Networks continues to focus on scaling its Next-Generation Security business, with CEO Nikesh Arora emphasizing the importance of innovation and execution as key drivers for growth. The company’s strong financial performance, combined with its strategic focus on platformization and expansion in key markets, positions it well for continued success in FY2025.

Shares of PANW jumped approximately 5% in reaction to the news but are seeing some resistance around the $360 level. The results were solid but do not support the 55x forward earnings valuation. However, the progress in its NGS unit and 20% jump in RPO are providing a tailwind for the stock in the after hours. Investors would have liked to have seen a stronger FY25 outlook but the company tends to be conservative so there is an argument that investors believe the company has more room for upside and the platformization strategy does appear to be bearing some fruit.

Overall, PANW’s Q4 results and forward guidance highlight its robust growth trajectory and ability to balance profitable growth with strategic investments. Despite some challenges in product revenue, the company’s strong performance in subscription and support revenue, along with its focus on next-generation security, underscores its leadership position in the cybersecurity industry.