Risks To Shareholder Returns Are Elevated At These Prices For Palo Alto Networks, Inc. (NASDAQ:PANW)

With a price-to-sales (or "P/S") ratio of 13.9x Palo Alto Networks, Inc. (NASDAQ:PANW) may be sending very bearish signals at the moment, given that almost half of all the Software companies in the United States have P/S ratios under 4.7x and even P/S lower than 1.7x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Palo Alto Networks

How Has Palo Alto Networks Performed Recently?

With revenue growth that's superior to most other companies of late, Palo Alto Networks has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Palo Alto Networks will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Palo Alto Networks would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 20% gain to the company's top line. Pleasingly, revenue has also lifted 95% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 16% per year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 18% per year, which is noticeably more attractive.

In light of this, it's alarming that Palo Alto Networks' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Palo Alto Networks' P/S Mean For Investors?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've concluded that Palo Alto Networks currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

Plus, you should also learn about these 3 warning signs we've spotted with Palo Alto Networks (including 1 which is potentially serious).

If these risks are making you reconsider your opinion on Palo Alto Networks, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.