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Why Palo Alto Networks, Inc. Might Keep Popping

By Brian D. Pacampara, CFA – Feb 3, 2014 at 10:27AM

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Does this analyst make a good case or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Palo Alto Networks, Inc. (PANW -3.20%) climbed more than 2% this morning after Wells Fargo upgraded the network security technologist from market perform to outperform.

So what: Along with the upgrade, analyst Gray Powell boosted his price target to $75-$81 (from $53-$56), representing as much as 36% worth of upside to Friday's close. While value investors might be turned off by the stock's sharp rebound in recent months, Powell thinks there's more room to bounce given his view that Palo Alto's legal battle with Juniper Networks (JNPR -0.18%) doesn't pose too much of a potential hit.

Now what: According to Wells, Palo Alto's risk/reward trade-off is pretty attractive at this point. "While the JNPR litigation has the potential to create volatility and drag on for months or years, after talking with a patent attorney, we are fairly confident that in a reasonably bad case scenario, PANW would only pay about a $45MM 1x settlement and a 4% royalty fee going forward," noted Powell. "In this event, PANW would still trade at only 20x 2015E FCF -- which we think is an attractive multiple for a company with 30%+ revenue growth in the security space." With Palo Alto shares up about 40% over just the past three months, however, I'd wait for some of the excitement to fade before buying into that bullishness.

Brian Pacampara has no position in any stocks mentioned, and neither does The Motley Fool. 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.

Stocks Mentioned

Juniper Networks Stock Quote
Juniper Networks
$32.86 (-0.18%) $0.06
Palo Alto Networks Stock Quote
Palo Alto Networks
$172.69 (-3.20%) $-5.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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