Option Trade 
Palo Alto Networks Inc (NYSE:PANW) Calls 
Thursday, 25 February, 2016

**OPTION TRADE: Buy the PANW Mar 2016 130.000 call (PANW160318C00130000) at approximately $7.00. Place a pre-determined sell at $14.00.

Note: No protective stop losses added -- but if you wish to do so make it $2.80.

by Ian Harvey

February 24, 2016

Palo Alto Networks Inc (NYSE: PANW), a cyber security company, is expected to report second-quarter revenue and profit above average analysts' estimate, after close of business today.

The cyber security company has been grabbing market share from traditional firewall suppliers. Rival FireEye Inc, last week, forecast a bigger-than-expected loss for the first quarter and said it expected growth in cyber security spending to slow this year. Palo Alto earlier this month announced a partnership with peer Proofpoint Inc to jointly provide security services to customers.

Therefore expect to see another strong quarter when Palo Alto releases its F2Q’16 earnings. The stock is down 32% since F1Q’15 earnings, although the company remains one of the stronger share gainers in its market. Despite its underperformance it is believed that the customer focus on cyber security as well as the company’s strong technology will help Palo Alto gain market share.

Looking forward in 2016, during the quarter, 56% of resellers were running ahead of plan with Palo Alto sales, and average reseller was 2.2% ahead of plan. These figures should provide expected revenue of $324.4 million, slightly better than Wall Street’s 2Q’16 revenue expectation of $318.3 million.

Revenue growth seems to be steady backed by strength across all its geographical regions and business segments. Also, customer wins, coupled with expansion of existing customers, positively impacted revenues. It is believed that the company's product refreshes will boost revenues, going forward. The company is also keen on expanding its cloud exposure.

As well, the lull in cybersecurity spending might only be temporary. According to the Identity Theft Resource Center, 169 million personal records were exposed last year in data breaches, up from 85.6 million in 2014. The alarming spike will likely convince more businesses to subscribe to Palo Alto's industry-standard firewall, for privileged accounts. Thanks to that higher spending, research firm Markets and Markets believes that the global cybersecurity market will grow from $106.3 billion in 2015 to $170.2 billion in 2020.

Therefore, Palo Alto’s firewall could be considered an essential expense in the future.

The average volume for Palo Alto Networks has been 1.7 million shares per day over the past 30 days. Palo Alto has a market cap of $12.5 billion and is part of the technology sector and computer hardware industry. The stock has a beta of 1.05 and a short float of 5.1% with 2.15 days to cover.

Factors to Consider

• The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation.

• PANW's debt-to-equity ratio of 0.91 is somewhat low overall.

• Looking at where the stock is today compared to one year ago, it is higher, and it has outperformed the rise in the S&P 500 over the same period.

• PANW has reported somewhat volatile earnings recently. But, it is felt that it is poised for EPS growth in the coming year. During the past fiscal year, Palo Alto Networks Inc continued to lose money by earning -$2.02 versus -$3.03 in the prior year. This year, the market expects an improvement in earnings ($1.76 versus -$2.02).

Analyst Frederick Grieb of Nomura expects to see another strong quarter and maintains a Buy rating on Palo Alto, with a price target of $200, as he continues to remain bullish given the highly ranked company’s product offerings and ability to gain market share.

Palo Alto Networks Inc’s stock had its “overweight” rating reiterated by research analysts at Piper Jaffray in a report released on Monday. They currently have a $208.00 target price on the network technology company’s stock. Piper Jaffray’s target price would indicate a potential upside of 62.58% from the stock’s previous close.

PANW has also been the subject of several other research reports:-

• Palo Alto Networks Inc’s stock had its “buy” rating restated by Morgan Stanley in a research report issued to clients and investors last Thursday.

• Nomura reaffirmed a “buy” rating on shares of Palo Alto Networks in a research note on Tuesday, February 16th.

• Vetr upgraded Palo Alto Networks from a “buy” rating to a “strong-buy” rating and set a $161.98 price target on the stock in a research report on Monday, February 8th.

• Deutsche Bank reaffirmed a “buy” rating on shares of Palo Alto Networks in a research note on Tuesday, January 26th.

• Finally, Wells Fargo reissued an “outperform” rating and issued a $225.00 price objective (up from $218.00) on shares of Palo Alto Networks in a research report on Thursday, February 11th.

As well, other large investors recently made changes to their positions in the company.

• River & Mercantile Asset Management bought a new stake in Palo Alto Networks during the fourth quarter valued at about $105,000.
• IPG Investment Advisors LLC bought a new stake in Palo Alto Networks during the fourth quarter valued at about $412,000.
• CIBC World Markets boosted its stake in Palo Alto Networks by 25.0% in the fourth quarter. CIBC World Markets now owns 2,500 shares of the network technology company’s stock valued at $440,000 after buying an additional 500 shares in the last quarter.
• HighPoint Advisor Group LLC boosted its stake in Palo Alto Networks by 3.7% in the fourth quarter. HighPoint Advisor Group LLC now owns 4,539 shares of the network technology company’s stock valued at $674,000 after buying an additional 163 shares in the last quarter.
• Finally, Candriam Luxembourg S.C.A. boosted its stake in Palo Alto Networks by 36.7% in the fourth quarter. Candriam Luxembourg S.C.A. now owns 4,922 shares of the network technology company’s stock valued at $867,000 after buying an additional 1,322 shares in the last quarter.

Currently there are 23 analysts that rate Palo Alto Networks a buy, no analysts rate it a sell, and 4 rate it a hold.

Harvey’s Options Volatility Indicator

Conclusion

Palo Alto is a high quality company that is exhibiting extraordinary growth characteristics for a company of its size in the security software arena.

Also note that the threat of bundled packages like Cisco's was overstated, since security has been purchased in a piecemeal fashion, as enterprises would choose what they believed to be the best product in each category. The U.S. government's use of both Cisco's network services and Palo Alto's firewall supports that idea.

Most importantly, Palo Alto stock is not expensive relative to its free cash flow, which soared 84% annually to $127 million last quarter. When comparing Palo Alto's EV/FCF ratio to its EV/Revenues ratio over the past two years, this is true -- the last time its EV/FCF ratio was near this level, the stock was trading near $60.

Palo Alto Networks still has plenty of room to grow, and that its EV/FCF ratio indicates that it's at its cheapest level in years.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the PANW Mar 2016 130.000 call (PANW160318C00130000) at approximately $7.00. Place a pre-determined sell at $14.00.

Note: No protective stop losses added -- but if you wish to do so make it $2.80.

”Success is simple. Do what's right, the right way, at the right time.”

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