Is the expensive Palo Alto Networks stock a buy or sell ahead of earnings?

Palo Alto Networks stock price has pulled back in the past few weeks, moving from the year-to-date high of $223 in October to the current $205. 

PANW will now be in the spotlight this week as the company publishes its financial results, which will provide more color on its growth. Its results come as some investors remain concerned about its valuation. 

Palo Alto Q1 earnings ahead

Palo Alto Networks, one of the biggest companies in the cybersecurity space, has done well over the years as demand for its solutions jumped. This growth happened despite the growing competition from other cybersecurity companies like Darktrace, Wiz, SentineOne, and Zscaler.

The most recent results showed that Palo Alto Networks’ business continued doing well in the final quarter of its fiscal year. These numbers revealed that its Remaining Performance Obligation (RPO) jumped by 24% to $15.8 billion.

RPO refers to the total contracted revenue that has not been recognized. It includes deferred revenue and unbilled revenue, and is a commonly-watched metric in the SaaS industry.

Palo Alto Networks’ revenue rose by 16% in the last quarter to $2.54 billion, while its operating margin rose by 150 basis points to 28.8%. This growth was likely because of platformization, which onboarded over 1,400 customers last quarter. 

PANW valuation concerns remain

Wall Street analysts are optimistic that the PANW business will report modest results on Wednesday. The average estimate is that its revenue rose by 15% in the first quarter to $2.46 billion. 

Its earnings-per-share (EPS) is expected to come in at 89 cents, up from the 78 cents it made in the same period last year. Additionally, the guidance for the second quarter is expected to come in at $2.58 billion, up by 14% YoY, while the EPS is expected to be 46 cents.

These numbers will confirm that the company's growth, while modest, is slowing this year. The annual revenue is expected to come in at $10.52 billion, up by about 14% from the same period last year.

The main concern is that the company's valuation has remained at an elevated level in the past few months. The company has  a non-GAAP PE ratio of 53, much higher than the sector median of 23.

Also, the GaaP PE ratio is 106, also higher than the technology sector median of 29, a sign that the valuation is significantly stretched compared to other companies. It is also more valued than a company like Nvidia, which is having faster revenue and profitability growth. 

Other valuation metrics also show that the company is not cheap. For example, the forward EV to EBITDA rose to 41, higher than the sector median of 14, while its PEG ratio of 3.59, higher than the sector median of 1.68.

Additionally, the rule of 40 metric shows that it is also highly overvalued. Its revenue growth is 14%, while the profit margin is 12%, giving it a figure of 26%.

READ MORE: Palo Alto shares jump 6% in premarket after Bank of America upgrade

PANW stock price technical analysis 

The daily timeframe chart shows that the PANW stock price has pulled back in the past few weeks, moving from the year-to-date high of $223 to the current $205. 

Palo Alto Networks has moved below the important support level at $210, its highest level in July this year. It has also moved below the 50-day Exponential Moving Average (EMA).

On the positive side, the stock has formed a morning star pattern, a common bullish reversal sign. Therefore, the stock will likely bounce back after earnings, and potentially hit the key resistance level at $220.

However, the valuation concerns may drag it lower, potentially to the psychological level at $200.