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Goldman Sachs Likes Palo Alto Networks As A Sector 'Disrupter'

Garrett Cook

Goldman Sachs was out Wednesday morning with an “Attractive coverage view” of security sector “disruptor” Palo Alto Networks (NYSE: PANW) with an individual Conviction Buy rating and a price target of $97 (a 27.64 percent premium to Tuesday's close).

Goldman noted evolving cyber threats producing costly data breaches and factors supporting increased M&A activity as a reason for being bullish. Palo Alto is the investment banks’ top pick. Palo Alto's positioning as a long-term growth "disrupter" along with accelerating profitability will continue to exceed forecasts from Wall Street analysts, Goldman Sachs noted.

The majority (59 percent) of those responding to Goldman Sachs' survey regarding security spending said they will increase spending with a new vendor, favoring stocks like Palo Alto and FireEye (NASDAQ: FEYE).

Consensus expectations for Palo Alto revenue is $581 million for FY2014 vs. Goldman's forecast of $582 million.

As for FY2015, consensus expects $779 million, while Goldman sees $802 million being docked as revenue. Regarding Free-Cash Flows, Goldman’s FY2015 forecast is 18.4 percent above the consensus.

Compared with 2012, Palo Alto's share of security sector revenues grew alongside that of FireEye, while Cisco Systems (NASDAQ: CSCO) and Juniper Networks (NYSE: JNPR) lost some of its share of revenues:

The speed of Palo Alto's growth ranks in the top of the sector and is supported by “increasing contribution to growth from the existing base.” High-profile breaches have driven firms to analyze firewalls and re-evaluate IT security measures. This is a top catalyst for Goldman Sachs, alongside improving sales productivity, robust product pipeline and improving sales.

Goldman Sach recommendations of this character can carry weight on Wall Street. Traders and investors may want to analyze and evaluate the suitability of the risks involved with trying to capture M&A Alpha through a Palo Alto acquisition by a large security or technology player.

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