Palo Alto stock performed well when it was a growth stock, but what about now, since the growth has slowed?
Palo Alto Networks (PANW -1.22%) stock is in a funk. Two months ago, the cybersecurity company reported powerful earnings — but slashed guidance, causing the stock to sell off. Palo Alto hasn’t recovered much since.
This might change. On Thursday, KeyBanc analyst Michael Turits lowered his price target on Palo Alto, as TheFly.com reports. Turits did say the stock is still worth about $355 per share, however, and he still rates Palo Alto Networks “overweight.”
But as a Palo Alto shareholder myself, I must admit: Turits’ optimism stands on pretty weak legs.
Is Palo Alto Networks stock a buy?
Consider: KeyBanc’s proprietary Value-Added Reseller (VAR) survey for the first quarter of 2024 revealed that half of the corporate IT departments that Palo Alto sells to are spending below their budgeted amounts on cybersecurity this year. Turits calls this number the “lowest quarterly reading since the heart of the pandemic.” Multiple other surveys back up this view — and indeed suggest the situation is getting worse, not better, for cybersecurity vendors like Palo Alto.
Turits’ conclusion: This is now “a trend,” and not a good one for Palo Alto stock. But if that’s the case, then why recommend buying Palo Alto stock today?
That’s an excellent question, because the more I look at this stock (which I own), the less I like it.
It’s priced at nearly 40 times earnings, and the collective wisdom of the nearly four dozen analysts who follow Palo Alto is that it will grow earnings only 18.5% annually over the next five years. That works out to a price/earnings-to-growth (PEG) ratio of 2.1 — whereas most value investors aim to buy for a PEG of less than 1.0.
Given the rich valuation, that makes the chances of Palo Alto stock outperforming the market over the next five years look pretty slim. Add in the near-term risk of Palo Alto trying to sell cybersecurity in a historically weak IT market, and now seems like a bad time to get into Palo Alto Networks stock.
Rich Smith has positions in Palo Alto Networks. The Motley Fool has positions in and recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
