Palo Alto Networks (NASDAQ:PANW) stock has displayed remarkable resilience over the past month, particularly when compared to other technology stocks. This stability presents an enticing opportunity for short sellers looking to generate additional income by selling out-of-the-money put options.
As of Monday, October 2nd, PANW stock is trading at $236.25, down only 2.5% from its September 1st closing price of $242.72.
Target Price Based on FCF Margin
We previously highlighted Palo Alto Network’s impressive adjusted free cash flow (FCF) and its role in making PANW an attractive investment. For instance, in the last quarter ending July 2023, the company’s adjusted FCF margins exceeded 38.7%. In the preceding year, its adjusted FCF margin stood at 33%. Therefore, it’s reasonable to anticipate an average adjusted FCF margin of 35.85% going forward.
Using this margin figure, we estimate that PANW could generate close to $3 billion in adjusted FCF for the fiscal year ending July 2024. Analysts’ sales estimates of $8.17 billion, multiplied by a 35.85% adjusted FCF margin, yield a figure of $2.93 billion in adjusted FCF.
Furthermore, by applying a 3.0% FCF yield metric, we can derive a price target for PANW stock. For example, if we divide the forecasted $2.93 billion in adjusted FCF by 3.0% (equivalent to a multiple of 33.3x), PANW stock could have a market capitalization of $97.3 billion. This represents a 33% increase from its current market cap of $73 billion, implying that PANW stock might reach $314.70 at some point in the coming year.
In fact, even at a 31x multiple of adjusted FCF, PANW stock could be valued around $300 per share, indicating a 27% increase from its current price. This suggests that the stock has substantial upside potential, making it appealing to long-term investors.
Generating Extra Income through Shorting OTM Puts
For investors holding PANW stock, there is an opportunity to generate additional income, especially since the company does not pay dividends, by selling short out-of-the-money (OTM) put options with near-term expirations.
For example, in a previous article, we discussed selling short put options with a $230 strike price that expired on September 29th. At the time, the premium received was $2.30 per put contract, and these puts were OTM by 5.24%. This trade yielded a 1.0% return for short sellers over 27 days, and since the stock closed above $230 by the expiration date, there was no obligation to purchase the stock at $230 per share.
Today, a similar return can be achieved by selling short the October 27th puts with a $220 strike price, which is over 7% below the current stock price. These puts are trading at $2.02, representing 0.918% of the $220 strike price. Investors with $22,000 in cash or margin can “Sell to Open” 1 put the contract at $2.20 per share for October 27th, receiving $202 immediately. Over 12 months, repeating this trade could result in a total expected return of $2,424, equivalent to 11.0% of the $22,000 invested in this strategy.
For those comfortable with higher exercise risk, selling short the $225 strike price puts, which trade at $3.04 or 1.35% of the strike price, can yield an expected annualized return of 16.2%. Furthermore, long-term stockholders can still benefit from the potential upside, as discussed in our target price analysis above.
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Author Faith Yakubu 
