MorningWord 11/24/15: $PANW: Palo Altitude

by Dan November 24, 2015 9:10 am • Commentary

Last night, Palo Alto Networks (PANW) handily beat fiscal Q1 expectations (eps .35 vs .32 estimate, sales $297 million vs $285 million estimate, and billings growth of 61% year over year, which was down sequentially from their Q4). Shares are up about 3% in the pre-market. The stock has rallied after the last 9 earnings report on average of 5.5%. The only thing to really pick on is decelerating sequential billings growth, but I suspect that is a fairly normal drop off from their seasonally strong Q4 where deals are pushed to close. Oh, I guess the other worry would be valuation, 100x expected fiscal 2016 earnings and 11x sales, but they are growing 100% and 40% respectively. PANW will either be gobbled up in a $20 or so billion take-over, or has the potential to continue to defy gravity and follow the path of SalesForce.com (CRM) as an outlier within a strong secular movement in computing.

PANW’s 300% plus return off of its 2013 lows, and the 40% gains year to date are nothing short of impressive. But the stock has lost a bit of its mojo since late July, while other high growth / high valuation tech stocks like Adobe, Amazon, Salesforce, Facebook, Google and Netflix all flirt with new all time highs. A failure today at the downtrend in the high $170s could set up a great short entry targeting a 10% to 15% re-tracement to the Oct/Nov lows:

panw10

Regular readers may identify a certain technical pattern forming on a longer term basis, just saying:

panw3

We are in a market environment where it makes little sense to try to pick a top in a momentum stock that is executing, which it appears PANW is. But a failure to breakout above the downtrend from the highs after apparent good fundamental news would highlight a fairly obvious divergence from the list above, possibly setting up for an attractive short term trade entry. Stay tuned for ways to play with defined risk.