The share price of Palo Alto Networks (PANW 0.34%) reached $380 earlier this year but currently sits at $293 as of this writing. The company continues to see strong demand for its cybersecurity solutions, and one analyst believes it's worth buying on the dip.
Morgan Stanley analyst Hamza Fodderwala is maintaining an overweight (buy) rating on the shares with a $360 price target -- 23% upside from the current share price.
Why the stock is down
Palo Alto's revenue grew 19% year over year in the January-ending quarter, with remaining performance obligations up 22%. But the solid top-line growth was overshadowed by management's guidance that calls for revenue to grow between 13% and 15% in fiscal Q3.
Importantly, this guidance doesn't reflect weak demand. Palo Alto's top 10 highest-spending customers grew their spend by 36% last quarter, and Morgan Stanley's research indicates that Palo Alto is competitively positioned to continue winning large deals.
And Palo Alto still has an enormous opportunity win more spending with existing customers. Management is doubling down on accelerating customers' shift from legacy security providers its three platforms, which include cloud security, security automation and operations, and network security. When customers adopt all three platforms, their lifetime value increases significantly.
Shares have dropped and trade at a price-to-sales valuation that is in line with leading cybersecurity providers, Looking at the valuation from another angle, the stock is trading at a multiple of 35 times trailing free cash flow.
When factoring in another year's worth of revenue and free cash flow growth, the stock could be on pace to hit the analyst's price target within the next year. The recent pullback in the shares should have reset near-term growth expectations, so market participants can return their focus to the company's long-term opportunities in the booming cybersecurity market.
