On November 20, Palo Alto Networks (NASDAQ:PANW) announced a 2-for-1 stock split, set for an ex-date of December 12. This announcement came alongside robust fiscal Q1 earnings, ending October 31, and impressive free cash flow (FCF) margins. Investors are taking note as the cybersecurity company projects strong FCF margins for its fiscal year ending July 31, 2025.
Currently trading at $386.77 as of November 29, Palo Alto Networks stock is projected to have an 18% upside, potentially reaching $456 per share. Here’s an analysis of its valuation and performance.
Exceptional Free Cash Flow Performance
Palo Alto Networks continues to solidify its position as a leader in cybersecurity solutions. For fiscal Q1, revenue grew by 14% to $1.4655 billion, with FCF representing an impressive 68.5% of revenue. This seasonal strength stems from the company’s subscription model, where most annual renewals occur in fiscal Q1.
Over the last 12 months, Palo Alto Networks generated $3.257 billion in FCF, equating to a 39.3% FCF margin on $8.288 billion in revenue. These metrics are consistent with its historical performance, where Q1 often sees the highest cash flow contribution.
Management’s guidance for fiscal 2025 estimates FCF margins between 37% and 38%, a reliable benchmark for setting future price targets.
Target Price and Valuation
For fiscal 2025, analysts forecast revenue of $9.15 billion, increasing to $10.58 billion in fiscal 2026. The next 12 months (NTM) revenue run rate averages $9.865 billion. Assuming a 38% FCF margin, Palo Alto Networks’ NTM FCF could reach $3.75 billion:
$9.865 billion x 0.38 = $3.7487 billion
Using a historical 2.5% FCF yield (40x multiple), the company’s market cap could grow to $150 billion:
$3.75 billion / 0.025 = $150 billion
This is an 18% increase from its current market cap of $127 billion, translating to a potential stock price of $456:
$386.77 current price x 1.18 = $456.39
Analyst Projections for Palo Alto Networks Stock
Analysts widely agree on the stock’s potential. Barchart’s survey reports a mean price target of $415.68, while Yahoo! Finance cites an average target of $409.89 from 53 analysts. AnaChart.com tracks 35 analysts with an average price target of $412.52.
Following the December stock split, these projections would equate to prices exceeding $200 per share, making PANW an appealing option for value investors.
Free Cash Flow Strategies for Investors
Investors can benefit from Palo Alto Networks’ robust cash flow by leveraging options strategies. For instance, shorting out-of-the-money (OTM) puts at strategic strike prices provides a way to generate income while positioning for future gains.
A Dec. 27 $375 put option currently trades at $5.30. This equates to a 1.413% immediate yield:
$5.30 / $375 = 1.413%
The breakeven cost drops to $369.70 ($375 – $5.30), offering a 4.48% discount to today’s price. With a delta ratio of -0.303, there’s only a 30% probability that PANW will reach this strike price, reducing the risk for investors.
Conclusion: Palo Alto Networks Stock Offers Value and Growth
Palo Alto Networks (NASDAQ:PANW) presents a compelling investment case with its exceptional free cash flow margins, strong earnings performance, and upcoming stock split. With analysts forecasting significant upside and options strategies providing additional income opportunities, PANW stock remains a top pick for value-focused investors.
Featured Image: Megapixl
