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Palo Alto Networks, Inc. Message Board

  • eyesandears51 eyesandears51 Mar 5, 2013 4:00 PM Flag

    PANW: Impressive Growth Prospects, Rich Valuation, Large Secondary Overhang

    Yellow caution sign. Fact PANW stock is down March 4, by a meaningful 4.36%, on very high trend confirming volume followed by a 1.5% rebound March 5 on lower volume. The drop was precipitated in part by disappointing guidance and another lockup expiration. Let’s do a deeper dive….how did that growth set up for future profitability? Year over Year Gross Margins were down 70 basis points, OPEX grew 78%, including a worrisome 69%% rise in G&A,YOY total operating loss increased to
    -$ 2.613 million from +$ .424 million. The bottom line is that revenue is projected to increase, but does not scale readily into future profitability.

    Stock technical’s are pointing to frothiness, the RSI is telegraphing an over bought condition, the stock crossed below the 20 day SMA and is close to the 50 day RMA, the stochastic’s are pointing to caution. Additionally PANW has a very high 5 year PEG ratio of 6.97, anything over 2 signal’s excessive valuation. The company also has a very high 12.9% short percentage of float, 10% is considered by many to be the threshold for a potential “ battleground stock “ The concern is confirmed by high insider selling, by five corporate officers, including CEO Mark D. McLaughlin , and CFO Steffan C. Tomlinson.

    Lastly, many expect the market to pullback by 5-10% sometime between now and the replay of the Washington DC double feature thriller horror movie " Sequestration " at the beginning of March, and US Government Debt Extension II March 27. A low beta stock could expect to experience a ratable retrenchment, higher beta issues have exaggerated movements up in good times and down during pullbacks. Put in context, during the last confrontation over the sequester in November, PANW dropped from $ 57.03 November 1 to $ 50.01 November 16, not sustainable surpassing $ 57.03 until February 22.

    Conclusion, PANW is a quality high growth company with strong mid/long term share appreciation potential, however at current price levels the 30-45 day risk/return is disproportionately negative. Adding to position’s after a price pullback, precipitated either by a normal market correction or sequester/debt expiration inspired retrenchment, suggests a buying range closer to the $ 50.60-$ 51.78, offers a better return with lower risk.

    Comments, and fact or precedent based alternative views welcome.

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