‘Ignore the Margin Fluctuations, PANW’s Fundamentals Are Solid,’ Says MS

Investment firm Morgan Stanley (MS) believes that cybersecurity firm Palo Alto Networks (PANW) is in a strong position to keep improving its margins, even as it integrates recent acquisitions like CyberArk and Chronosphere. According to analyst Meta Marshall, the recent margin fluctuations are not due to any major problems with the business. Instead, they are mostly caused by the mix of products and services the company is selling. Therefore, Morgan Stanley does not view this as a structural issue and remains bullish on Palo Alto, with a Buy rating and a $223 per-share price target.

Notably, product margins have been pressured because the company is selling more lower-margin hardware and dealing with higher component costs. At the same time, service margins were slightly lower last quarter due to a higher share of SaaS products, which tend to start with lower margins but improve over time as they scale. However, management made it clear that profitability remains a key focus, especially when it comes to acquisitions.

Over time, Palo Alto expects these businesses to help it reach its goal of achieving free cash flow margins of more than 40% in the long run. The company is also seeing strong growth in areas like AI security, cloud security, SIEM, and SASE. In addition, its platform strategy, where customers can manage multiple security tools in one place, is gaining traction as companies look to simplify their systems. Indeed, sales execution is improving, with more sales reps now selling bundled solutions, helped in part by AI tools.

Is PANW Stock a Good Buy?

Turning to Wall Street, analysts have a Strong Buy consensus rating on PANW stock based on 29 Buys, two Holds, and zero Sells assigned in the past three months, as indicated by the graphic below. Furthermore, the average PANW price target of $213.13 per share implies 31.3% upside potential.