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Palo Alto (PANW) to Report Q3 Earnings: What Lies in Store?

Zacks Equity Research

Palo Alto Networks PANW is scheduled to release third-quarter fiscal 2020 results on May 21.

The company expects revenue growth of 15-17% year over year to $835-$850 million. The Zacks Consensus Estimate for revenues is pegged at $826.9 million, implying a 13.81% increase from the year-ago quarter's reported figure.

The company anticipates non-GAAP earnings in a band of 96-98 cents per share. The consensus mark for the same is pegged at 91 cents, indicating a year-over-year decline of 30.53%.

Its earnings beat estimates in the trailing four quarters, the average positive surprise being 4.13%.
 

Palo Alto Networks, Inc. Price and Consensus

Palo Alto Networks, Inc. Price and Consensus

Palo Alto Networks, Inc. price-consensus-chart | Palo Alto Networks, Inc. Quote

Factors at Play

Palo Alto’s third-quarter fiscal 2020 earnings are likely to have been driven by strong momentum for deal wins, which in turn is likely to have driven revenues.

Notably, FedRAMP recognitions are boosting the adoption of Palo Alto’s products by government organizations. In March, the company announced that its IoT product — Zingbox IoT Guardian — has been deemed “In Process” for the Federal Risk and Authorization Management Program (FedRAMP). This FedRAMP recognition reflects the trust the U.S. public sector puts in Palo Alto’s IoT security solutions. Further, the Prisma Cloud’s “In Process” status is boosting the visibility of the company’s products to government organizations. This has likely encouraged the adoption of its products.

Moreover, in an effort to contain the coronavirus's spread, a huge global workforce is working remotely. But more people logging into employers' networks means a greater need for security. This trend is likely to have positively impacted demand for the company’s products in the fourth quarter.

The company is also gaining from the acquisition of Redlock, which forms the basis of the Prisma public cloud, and Demisto, which forms the basis of Cortex. Prisma and Cortex are likely to have continued performing well during the fiscal third quarter, which is a positive for billings. The growing and accelerated migration to the cloud owing to the social-distancing regulations is likely to have boosted the adoption of these platforms. Notably, the company expects billings growth between 19% and 22% year over year ($980 million-$1 billion) during the third quarter.

However, Palo Alto expects capital expenditure of approximately $85-$90 million to be an overhang in the third quarter, with approximately $50 million allocated for future expansion of its headquarters in Santa Clara.

Besides, the Sino-U.S. trade war along with travel and import restrictions related to the coronavirus pandemic is negatively impacting the manufacturing of certain products as the components are available only in China. This is likely to have remained an overhang.
 
What Our Model Says

The proven Zacks model predicts an earnings beat for Palo Alto this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of beating estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Palo Alto has an Earnings ESP of +5.70% and a Zacks Rank #3.

Other Stocks to Consider

Here are a couple of stocks you may consider, as our model shows that these have the right combination of elements to beat on earnings this season:

Adamas Pharmaceuticals Inc. ADMS has an Earnings ESP of +4.86% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA Corporation NVDA has an Earnings ESP of +0.15% and a Zacks Rank of 2.

Cisco Systems Inc. CSCO has an Earnings ESP of +6.29% and a Zacks Rank #3.

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