The Colonial Pipeline hack shook U.S. oil infrastructure and caused many consumers to panic, some in comical fashion. While some companies suffered as a result of this, it shined a new light on the cybersecurity industry. Palo Alto Networks Inc. (NYSE: PANW) has been one of the companies in focus, and one analyst sees a fair amount of upside for the stock from here.

Raymond James upgraded the shares to Outperform from Market Perform. Its $400 price target implies upside of 19% from the most recent closing price of $335.80.

The brokerage firm noted that Palo Alto Networks has underperformed significantly year to date (note: Fortinet +35% versus Palo Alto Networks −5%). Raymond James previously noted its concern that next-gen ARR guidance did not appear conservative, but it still does see this as a risk, and the stock has been penalized as relative valuation has compressed. The analyst’s focus now has been turned to increased confidence that Palo Alto Networks can enter into a period of healthy growth and incremental profitability that are hallmarks of outperforming stocks in this space.

Raymond James further detailed in the report:

Specifically, we have recently picked up increasing deal sizes with channel partners that have been investing in technical resources to support the Prisma platform, and our recent expert conversations have suggested this platform has improved in functionality. The Prisma SD-WAN product (key industry growth driver) has recently been rebranded, repackaged, and is now available in PANW procurement vehicles, which is relevant as part of this relative underperformance can be attributable to PANW’s lack of meaningful SD-WAN presence.

In financial terms, Raymond James believes these dynamics are important, as the Palo Alto Networks model has largely lacked a sustained period of operating leverage in recent years (EBIT % low 20s and declining to high teens), and peers that have shown operating leverage (Fortinet) have been rewarded. However, broader platform sales with large deal sizes generally coincide with healthy contribution margin, and the brokerage firm sees an upturn coming as this unfolds.

Palo Alto Networks stock traded up about 3% Tuesday morning to $345.34, in a 52-week range of $217.48 to $403.00. The consensus price target is $446.65.

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