Why Palo Alto Networks, Inc. Shares Jumped

Is Palo Alto Networks' rise meaningful? Or just another movement?

May 29, 2014 at 4:19PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Palo Alto Networks (NYSE:PANW) rose more than 12% early Thursday, then settled to close up around 5% after the company turned in solid fiscal third-quarter results and announced a settlement in a patent infringement case.

So what: Quarterly revenue increased 49% year over year to $150.7 million, which translated to adjusted net income of $8.7 million, or $0.11 per diluted share. Analysts, on average, were looking for adjusted earnings of $0.10 per share on sales of $146.2 million.

In addition, Palo Alto Networks announced it has reached a settlement with Juniper Networks in which both companies will dismiss all patent litigation, and license all patents at issue in the outstanding suits to each other for the life of those patents. As part of the deal, Palo Alto will pay Juniper a one-time settlement of $175 million, including $75 million in cash, $70 million in shares of common stock, and a warrant to purchase roughly $30 million of common stock.

Now what: The settlement isn't exactly ideal, considering only a few months ago Palo Alto Networks CEO Mark McLaughlin insisted they "look forward to proving [...] that we do not infringe the Juniper patents." But today, McLaughlin stated the agreement "allows us to further focus our resources and time on our customer and growing our business."

Shares of Palo Alto Networks currently trade at a steep 10.7 times trailing 12-month sales and 122 times next year's estimated earnings, so I'm not particularly inclined to dive in today. But I will admit that resolving the patent infringement suit removes significant uncertainty for skittish shareholders. If Palo Alto Networks can sustain its past torrid rates of growth going forward, the stock could reward patient investors down the road.

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Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Palo Alto Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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