Palo Alto Networks one of 2022’s best software stocks after another beat-and-raise quarter

With its shares rising as much as 8% Friday, the company’s stock finished the session being 9.8% down year to date. In comparison, the ETFMG Prime Cyber Security ETF 
HACK,
+0.42%
is down 26.4% year to date, the First Trust Nasdaq Cybersecurity ETF
CIBR,
+1.13%
is off 23.5%, the S&P 500 index
SPX,
+0.48%
 is down 16.8% and the tech-heavy Nasdaq Composite Index 
COMP,
-5.08%
 is off 28.8%.

Citi Research analyst Fatima Boolani, who has a buy rating, said in a Friday note that Palo Alto Networks “handily cleared all key growth and profitability hurdles.”

While it was another beat-and-raise quarter, Boolani acknowledged the restraint in the “raise” part, which she said signaled “prudence against budget/large deal scrutiny” that the company “is seeing in pockets, and where Palo Alto Networks’ proactive deal rigor/pipeline coverage offer estimate risk backstop.” 

Jefferies analyst Joseph Gallo, who has also has a buy rating, applauded the company’s annual recurring revenue, or ARR, growth of 67% and said that durable booking helped as deal cycles elongate. ARR is a metric often used by software-as-a-service, or SaaS, companies to show how much revenue the company can expect based on subscriptions. 

Gallo, however, said he was keeping an eye on billings growth, which slowed with only a 27% year-over-year gain, and on a slowdown of large-deal growth, which was at its lowest since the middle of 2019.

Stifel analyst Adam Borg, who has a buy rating, said Palo Alto Networks’ report “checked all the boxes.”

“Net/net, we continue to believe Palo has a number of drivers to sustain at least 20%+ top-line growth and operating-margin/free cash flow expansion in coming years,” Borg said. “More broadly, we continue to believe that Palo is well positioned to be a natural consolidator of cybersecurity spend and that its growth/profitability characteristics provide a degree of defensibility in uncertain times.”

Of the 41 analysts surveyed by FactSet, 37 have buy-grade ratings and four have hold ratings. The stock hasn’t carried a sell rating from any analyst surveyed by FactSet since January 2022. Of the analysts covering the stock, 10 raised and six lowered their price targets, resulting in an average of $217.87, down from a previous $219.21, according to FactSet data.

While Palo Alto Networks isn’t on the S&P 500, it is on the Nasdaq 100
NDX,
+0.00%,
where it’s the 32nd-best performer in the year to date. But among tech companies, the only better performers are analog chip makers like Texas Instruments Inc.
TXN,
-0.10%
and Analog Devices Inc.
ADI,
+0.24%
and video-game publishers Activision Blizzard Inc.
ATVI,
+0.39%
— which is just waiting for the Microsoft Corp.
MSFT,
-0.19%
acquisition to close — and Electronic Arts Inc.
EA,
+1.11%.

Although it’s not on the Nasdaq 100, the only better-performing stocks in the field of enterprise software of much import are those of International Business Machines Corp.
IBM,
+1.06%,
which is up 10.5% year to date, and product management software company PTC Inc.
PTC,
-0.46%,
which is up 1.8% year to date.