Option Trade 
Palo Alto Networks Inc (NYSE:PANW) Calls 
Thursday, 03 March, 2016

**OPTION TRADE: Buy the PANW Jun 2016 160.000 call (PANW160617C00160000) at approximately $8.00. Place a pre-determined sell at $16.00.

Note: No protective stop losses added -- but if you wish to do so make it $3.20.

by Ian Harvey

March 03, 2016

Last week Palo Alto Networks Inc (NYSE: PANW), a cyber security company, reported its fiscal Q2 earnings, posting revenues of $334.7 million and earnings of $0.40 per share, beating consensus estimates of $318.3 million and $0.39, respectively. Deferred revenue also surpassed consensus at $928.8 million vs. $902.9 million.

And as you are aware, our option trade on PANW completed very quickly!

PANW has continued to consolidate and move upwards. Palo Alto Networks Inc. is seen as a next-generation leader in the enterprise security space, but so far as 2016 has been concerned it was off to a slow start with the stock down over 15%, but seems to have now turned the corner since the report.

Palo Alto has a roughly 10% market share, but is posting more than 50% revenue growth and more than 60% billings growth. It is currently seeing its fastest growth in the U.S., though it should be able to develop its international sales force over time. Management is doing a good job at balancing focus on revenue growth and increased profitability.

Also note that the company could become an acquisition target for a larger tech player, much the way that McAfee was acquired by Intel and SourceFire by Cisco.

While Palo Alto stock trades at lofty multiples, the company is growing substantially faster than most competitors, suggesting that it is both taking market share and generating more revenue from existing clients.

The company added 2,000 new customers in the fiscal second quarter, increasing its customer base to 30,000. Palo Alto expects continued strong demand for its services. The computing network threat environment has never been more toxic, with numerous well-publicized security breaches of large businesses, as well as government agencies. Industry tracker IDC expects the enterprise security market, including both network and endpoint security, to grow at a 7% compound annual rate, to $19.5 billion, through 2018.

Palo Alto Networks will open at 148.59 today, Thursday. The company’s 50-day moving average price is $139.50 and its 200-day moving average price is $164.10. Palo Alto Networks has a one year low of $111.09 and a one year high of $200.55. The stock’s market capitalization is $12.77 billion.

Analyst Philip Winslow of Credit Suisse attributes the company’s strong earnings to y/y growth in product revenue, “continued success in Wildfire and Traps,” and new customer acquisitions. According to the analyst, “These data points highlight Palo Alto’s ability to upsell into its installed base and sell additional services, which remains core to [his] positive thesis.” While a higher than expected subscription rate caused management to lower its operating margin guidance for FY16, as a result of higher in-period sales commissions relative to ratable revenue, management stated an expected 40% increase in FCF margin in the second half of 2016. Despite this “disappointing” margin guidance, the analyst believes “the company’s long-term margin structure has not changed” and will look for updates in the company’s analyst day.

Winslow reiterates his Outperform rating on the company with a $225 price target. He explains, “We continue to believe that Palo Alto Networks’ unique technology platform position the company to continue to gain share in the network security market—driving strong, sustained revenue growth.”

As well, according to Scott Zeller, a Needham analyst, PANW’s billings of $459 million exceeded consensus expectations of $417 million. It was the company’s highest billings growth in the last 11 quarters.

Healthy growth in deferred revenues means that significant revenue growth can be expected. Industry analysts keep a watchful eye on billings growth in the cybersecurity space because it gives them an indication of a company’s future revenues.

In comparison, PANW’s peers FireEye (FEYE) and Fortinet (FTNT) reported billings growth of 21% and 37%, respectively, in their recent fiscal quarters.

Brokerage firm Bank of America Upgrades its rating on Palo Alto Networks Inc. The shares have been rated Buy. Previously, the analysts had a Neutral rating on the shares. The rating by Bank of America was issued on Feb 26, 2016.

In a different note, On Feb 26, 2016, Barclays said it Maintains its rating on Palo Alto Networks Inc. In the research note, the firm Raises the price-target to $170.00 per share. The shares have been rated ‘Ovewr’ by the firm.

Also, Palo Alto Networks Inc‘s stock had its “buy” rating restated by Argus in a research report issued on Wednesday. They currently have a $205.00 price target on the network technology company’s stock. Argus’ target price suggests a potential upside of 37.92% from the stock’s current price. PANW has also been the subject of several other research reports:-

• Credit Suisse restated an “outperform” rating and set a $225.00 price target on shares of Palo Alto Networks in a research note on Wednesday.

• Nomura restated a “buy” rating and set a $200.00 price target on shares of Palo Alto Networks in a research note on Tuesday.

• JPMorgan Chase & Co. reaffirmed a “buy” rating on shares of Palo Alto Networks in a research report on Saturday. RBC Capital reaffirmed a “buy” rating on shares of Palo Alto Networks in a research report on Saturday.

• Finally, Pacific Crest reaffirmed a “buy” rating on shares of Palo Alto Networks in a research report on Saturday.

One analyst has rated the stock with a sell rating, six have assigned a hold rating and thirty-four have issued a buy rating to the company. The company presently has a consensus rating of “Buy” and an average price target of $190.74.

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

• Stifel Financial Corp raised its stake in shares of Palo Alto Networks by 87.8% in the fourth quarter. Stifel Financial Corp now owns 26,881 shares of the network technology company’s stock valued at $4,734,000 after buying an additional 12,568 shares in the last quarter.
• Hellman Jordan Management Co. Inc. MA purchased a new stake in shares of Palo Alto Networks during the fourth quarter valued at about $12,454,000.
• Royal London Asset Management Ltd. raised its stake in shares of Palo Alto Networks by 95.5% in the fourth quarter. Royal London Asset Management Ltd. now owns 29,337 shares of the network technology company’s stock valued at $5,184,000 after buying an additional 14,332 shares in the last quarter.
• IBM Retirement Fund raised its stake in shares of Palo Alto Networks by 8.7% in the fourth quarter. IBM Retirement Fund now owns 18,231 shares of the network technology company’s stock valued at $3,211,000 after buying an additional 1,464 shares in the last quarter.
• Finally, Janney Montgomery Scott LLC raised its stake in shares of Palo Alto Networks by 21.8% in the fourth quarter. Janney Montgomery Scott LLC now owns 15,029 shares of the network technology company’s stock valued at $2,647,000 after buying an additional 2,689 shares in the last quarter.

Harvey’s Options Volatility Indicator

Conclusion

So it’s a case of getting back-on-the-band-wagon and riding the growth being generated by Palo Alto Networks Inc.

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

**OPTION TRADE: Buy the PANW Jun 2016 160.000 call (PANW160617C00160000) at approximately $8.00. Place a pre-determined sell at $16.00.

Note: No protective stop losses added -- but if you wish to do so make it $3.20.

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

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.



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