Why Did Palo Alto Networks Stock Drop Today?
Key Points
Evercore ISI analyst Peter Levine raised his price target on Palo Alto Networks to $415 today.
Levine sees free cash flow growing impressively in 2027.
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Palo Alto Networks (NASDAQ: PANW) stock closed down 4.9% on Wednesday -- which is kind of surprising, because according to one Wall Street analyst, the stock should go up as much as 30% over the next year.
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Evercore loves Palo Alto Networks
This morning, you see, Evercore ISI analyst Peter Levine raised his price target on Palo Alto Networks from $320 to $415. Instead of rising, however, Palo Alto stock fell... to almost precisely $320!
This probably wasn't the reaction Levine was expecting -- but why did he raise his price target past $320 in the first place?
Well, according to the analyst, "cyber channel checks" confirm Palo Alto is "at the center of identity, observability, and AI-powered SecOps," and likely to benefit from consolidation in the cybersecurity industry, leading to improved free cash flow. Levine believes Palo Alto, which generated $3.5 billion in free cash flow last year and $3.8 billion over the past 12 months, will continue to grow into 2027, and is worth 52 times next year's projected FCF.
That works out to about $338 billion, or $415 per share.
Valuing Palo Alto stock
Is this reasonable? It appears to imply that Levine is forecasting a positive cash profit of $6.5 billion next year -- quite an increase year over year and significantly higher than the consensus estimate on Wall Street, which, according to S&P Global Market Intelligence data, puts Palo Alto at $5.2 billion in 2027.
If Palo Alto achieves such a result next year, it's going to surprise a lot of investors, me among them. If Palo Alto fails to grow as fast as Levine is projecting, though, 52x FCF is going to look like an awfully high price to pay for this stock.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
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