NVDA - Palo Alto: Deferred Billings Impact FCF Amid Growth Slowdown

2024-06-02 20:00:00 ET

Summary

• The stock has dropped more than 20% after disappointing earnings results, potentially due to high expectations on generative AI.
• The company's 40-Rules are still holding up but are close to the edge of 40% as revenue growth is approaching single digit.
• A significant slowdown in billings growth in 3Q and conservative forward guidance indicates a significant headwind in FCF growth.
• The stock is currently trading at 53x of P/E FTM, while revenue and FCF growth may slow down in the coming quarters, suggesting that it's fully priced in AI tailwinds.
• The company's margins remain resilient and continue to expand, indicating strong operating efficiency.

Investment Thesis

Palo Alto Networks, Inc. (PANW)'s stock has tanked almost a 30% after the 3Q FY2024 earnings results. I believe that this massive selloff could be justified due to the high expectations on Generative AI leading into the earnings, as the stock had rallied 170% in February from CY2023's low. In my previous article , I initiated a buy rating and discussed the company's sustainable path to achieving the "40-rule" as its top-line growth slowed down. Since then, the stock has risen by over 40%....

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