$PANW Fiscal Q1 Earnings Cheat Sheet

by Enis November 24, 2014 12:16 pm • Commentary

Event:  PANW reports its fiscal Q1 earnings today after the close.  The options market is implying about a 7% one day move, which is in line with the 4 quarter average of 7% and below the 8 quarter average of about 5.75%.

Sentiment:  Wall Street analysts are very positive on PANW, with 28 buys, 4 holds, and only 1 sell.  Analysts have not been able to raise their price targets quickly enough, as the average 12 month price target is only around $115.  PANW is up 93% year-to-date.  It’s somewhat surprising to see that the short interest for PANW is only around 5% of the float, much lower than most other high P/E tech stocks.

Options Open Interest:  Total open interest in PANW is split nearly evenly between calls and puts.  The recent one month volume has also been close to evenly split, with volumes favoring puts over calls by a ratio of about 1.1 to 1.

The weekly 104 put line is the only weekly strike with over 1k of open interest.  The Dec20th 105 and 110 calls both have over 2k of open interest.

Price Action / Technicals:  PANW has been in a very strong uptrend over the past year, more than doubling in that period:

PANW daily chart, 50 day moving average in pink, 200 day moving average in yellow, courtesy of Bloomberg
PANW daily chart, 50 day moving average in pink, 200 day moving average in yellow, courtesy of Bloomberg

The stock is trading at an all-time high, so there is no resistance on the upside.  On the downside, the rising 50 day moving average has acted as support over the past 6 months, and is currently around $103.  On a longer-term basis, the $85 level is the breakout spot that is important support going forward.

Volatility:  30 day implied volatility is lower than it has been prior to any of PANW’s earnings reports over the past 2 years:

30 day implied volatility in PANW, courtesy of Bloomberg
30 day implied volatility in PANW, courtesy of Bloomberg

One possible reason for that is likely the simple fact that PANW’s appreciation has taken the market cap to nearly $10 billion, where each incremental purchase or sale has a smaller impact than before.  The holiday season could also be lowering traders’ expectations for volatility over the next month.

Our View:  PANW is in the sweet spot of a secular trend in terms of a hot technology growth story.  The company is a leader in enterprise security to protect networks from cyber attacks and security breaches.  The company has only been public since 2012, but analysts expected continued rapid expansion, with sales growth of 30% expected over the next couple of years and accompanying earnings growth of 70-100%.  The stock is quite highly valued already, however, trading on a 80 P/E for 2016 earnings estimates, 2 full years away.

At this juncture, PANW is trading more as a favored momentum stock than on any short-term view of the fundamental story.  Barring a major surprise in today’s earnings report, the uptrending price action (as long as it persists) itself is likely to remain a major factor for the stock price in the coming months.