HSBC cuts Palo Alto rating on valuation concerns; stock down

Investing.com -- HSBC (LON:HSBA) downgraded Palo Alto Networks Inc (NASDAQ:PANW) shares to Reduce from Hold amid valuation concerns. The investment bank also reduced the price target on the stock to $291 from $304.

The company's shares fell over 1% in premarket trading Friday. 

The move comes in the wake of Palo Alto’s financial results for the fiscal Q1 2025. The company delivered a solid performance with revenue at $2,139 million, marking a 13.9% year-over-year increase and aligning with HSBC and consensus estimates.

The company's non-GAAP operating margin also exceeded expectations at 28.81%, higher than both HSBC's estimate of 27.63% and the consensus of 27.75%.

Palo Alto Networks provided guidance for the full fiscal 2025 (FY25), projecting revenues of $9,145 million and non-GAAP EPS of $6.33 million, both figures surpassing pre-results consensus estimates.

Despite the strong quarter, HSBC analysts raised concerns regarding the market's expectations for Palo Alto's growth trajectory, particularly the anticipated rebound in FY26 and beyond.

“We believe the market is likely overestimating the impact of platformization on the growth of Palo Alto Networks and overestimating the likely bounceback in FY26e onwards,” analysts led by Stephen Bersey said.

“We believe the recent re-rating of the stock is linked to expectations of a strong rebound in FY26e, which may not be fulfilled.”

Palo Alto recently introduced a new strategy aimed at attracting customers by offering free modules for a limited period, which had been identified as a potential growth headwind.

However, HSBC notes that measuring the success of this approach was unclear during the trial phase. The bank expresses skepticism about whether the strategy, even if successful, could significantly boost sales of new modules to restore revenue growth to the 20%+ levels previously achieved.

“Thus, we think the stock is being priced like a 20%+ growth company while a mid-teen revenue growth trajectory may be more likely, and thus see the risk of a significant downward rerating,” analysts continued.

The downgrade is also influenced by PANW’s current trading multiples, which HSBC deems excessive. The stock trades at 55.8x its price-to-earnings (P/E) for the calendar year 2025, significantly higher than the 29.5x median for the sector.

Despite expecting a non-GAAP EPS compound annual growth rate (CAGR) of 19.3% over CY24-27e for Palo Alto, HSBC considers the stock expensive at its current levels.