Two fallen angel megacaps in a rich market now that July CPI proved a non-event, I see a beautiful opportunity to scale up my long Palo Alto Networks (PANW) and Eli Lilly (ELY) to former darlings of Mr. Market who have been sandbagged by adverse events in the last two weeks. My rationale?
Palo Alto Networks (PANW) was slammed down to 165 after its $25 billion acquisition deal was dissed by Mr. Market. This is an insane overreaction. I just sold high delta PANW options up the wazoo since my math tells me that a $30 hit is only rational if an asteroid hits Santa Clara in the next month and prevents my one month puts from expiring worthless. Thank you Mr. Market for another no-brainer ahlan wa sahalan trade. I love you, you love me, we are a happy family as Barney loved to croon to my baby twins.
True, Nikesh Arora is financing the CyberArk deal with only 2.5% cash and thus a Himalayan stock dilution. EPS now takes a 13% hit on a 100 million new shares to finance the deal and hence the meltdown to 165. As usual, Mr. Market ignores the EPS growth steroid shot that CyberArk provides the moment the deal closes next year since woke central demons have been exorcised by Trump at the SEC/Justice.
Mr. Arora did not CyberArk on a whim. The cost and revenue synergies have been totally ignored by the stock market, not to mention product cross selling growth in the post merger platform. The oracles of Delphi in the Embarcadero Center in San Fran are sure that PANW operating margins will rise from 28%-32%, thanks to this deal.
My cyber security guru Arjun and I both believe that the House of Arora is now all set to roar above 200 as these factors seep into the playing fields of Old Greenwich and Mayfair. The twin hedge fund capitals of the universe. I concede this puppy is not cheap at 45 times forward earnings but Cybersecurity is one of the fastest growth niches of software and a natural beneficiary of the AI revolution.
Growth is not a problem with the val metrics as Nikesh has traded at 75X in the past and is now trading at the low end of his valuation range since he became CEO even though EPS growth now gets a Noah’s Ark. Of course, the proof of the pudding is on August 18th when the earnings thunderbolt descends from cybersecurity Mount Olympus in Santa Clara. My call, Zeus will not disappoint us and the val multiple will rerate back to my 200 target, which is well below fair value for one of global technologies true class acts.
Eli Lilly was also slammed by 15% because the oral Ozempic pill generated only 12% body weight loss and not the 15% Wall Street wanted. Get real guys. FDA approval is now certain and we just got a 15% discount on the only Big Pharma other than AbbVie worth owning in the age of RFK Junior. I do not know enough about the science and regulatory politics of anti-obesity drugs but there will be a robust global market for the LLY pill and thus I have no problem buying this puppy (actually, a mutated giant St. Bernard) at 625 as I know it can give me at least $30 in low risk option premium.
Also published on Medium.
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