3 Tailwinds Driving Palo Alto Networks to Fresh Highs Palo Alto has joined the relatively short list of tech stocks that have gone on to hit all-time highs this year, and this is a trend set to continue.

By Sam Quirke

This story originally appeared on MarketBeat

Palo Alto Networks stock price Just as it looked like shares of Palo Alto Networks (NASDAQ: PANW) were on the verge of topping July's all-time high earlier this month, investors of the cyber security stock got a rude awakening. Poor earnings and forward guidance from their competitors Fortinet Inc (NASDAQ: FTNT), as well as a cooling in their own growth outlook from teams at Wedbush and Oppenheimer, conspired to send shares down 20% in the two weeks prior to last Friday's quarterly report.

It was starting to look like the bears might have been right with their concerns regarding Palo Alto's frothy valuation. To be fair, a price-to-earnings (PE) ratio in the triple digits is as much a red flag for many investors today as it was par for the course when interest rates were at all-time lows. But the tightening cycle from the Fed has pushed up borrowing costs and so steepened the path to success for growth names like Palo Alto.

It's for this reason that so many tech names have fallen from grace in the past two years, with many still 50% off their former highs. However, Palo Alto's continued buoyancy in the face of rising interest rates and a bubbly PE ratio speaks volumes to how Wall Street views them differently.

Not only have Palo Alto shares held onto their gains from the pandemic years, but they've also joined the relatively short list of tech stocks that have gone on to hit all-time highs this year. Last Friday's report gave an insight into why this is the case, and there are three standout reasons to think they'll soon be back at fresh highs.

Earnings Expectations Beaten

For companies like Palo Alto, who have high PE ratios, it's essential that they consistently deliver strong earnings numbers. This reassures investors that the company is on track with its growth and scaling plans and so helps to justify the otherwise unpalatable valuation.

One of the quickest and easiest ways to gauge if a report has come in hot or cold is to see if the numbers have beaten analysts' expectations. On this front, Palo Alto's revenue came in just shy of the consensus, while EPS more than made up for this by coming in well ahead.

On top of this, the $0.74 print was the company's highest ever and more than double the previous quarter's number. It also marked the ninth quarter in a row of increased EPS and the fifth quarter in a row of profitability.

This was exactly what the bulls were looking for, and the strengthening track record bodes well for the company's future potential. Investors and funds will now be even more justified in establishing or adding to existing positions in Palo Alto stock.

Had they missed expectations or even reversed the trend, the 20% drop from the previous fortnight might well have been multiplied. Instead, shares gained more than 15% in yesterday's session and all but reversed the slip while reestablishing the uptrend.

Strong Forward Guidance

In addition to performing well in the quarter just ended, Palo Alto's management offered forward guidance on billings and earnings for the coming quarters, which was also higher than expected. An upside surprise like this is also considered a great sign by Wall Street and almost always results in shares jumping higher, as we saw yesterday.

What made it even sweeter was that it came after one of Palo Alto's closest competitors, Fortinet, lowered its guidance two weeks earlier. Investors had assumed the same headwinds would also affect Palo Alto's outlook, and this was a driver in shares being sold all the way through to last week.

With this worst-case scenario now removed, the stock is empowered to get right back to where it was before those concerns took shares down.

Investors will now be expecting Palo Alto to deliver on this improved outlook in the coming quarters. While this increases the stakes for the company, it will also drive volume onto the bid as Palo Alto establishes itself as one of the best-performing names in a hot industry such as cybersecurity.

Bullish Price Targets

Last but not least, there are the bullish price targets from the analysts. Wedbush, for example, reiterated their Outperform rating on the stock in the wake of Friday's release, along with their price target of $290. From where shares closed last night, that points to a further upside of at least 20% and were Palo Alto shares to hit that they'd be at fresh all-time highs.

Bank of America followed suit, writing in a note to clients that Palo Alto's guidance had "calmed investor concerns" around a broader industry slowdown. They boosted their price target to the same $290 as Wedbush. Having voices like these on your side makes getting involved in a stock all that much easier, and we expect similar sentiments to be published in the days ahead, further strengthening the upside case from here.

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