Over the last six months, Palo Alto Networks’s shares have sunk to $168.75, producing a disappointing 9.9% loss - a stark contrast to the S&P 500’s 3.6% gain. This may have investors wondering how to approach the situation.
Is now the time to buy Palo Alto Networks, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Palo Alto Networks Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are two reasons why we avoid PANW and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last three years, Palo Alto Networks grew its sales at a 19.7% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds. 
2. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Palo Alto Networks’s billings came in at $2.6 billion in Q1, and over the last four quarters, its year-on-year growth averaged 3%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
Final Judgment
Palo Alto Networks isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 11.8× forward price-to-sales (or $168.75 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at one of our all-time favorite software stocks.
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