Business Strategy and Outlook

Palo Alto Networks became a leading cybersecurity provider through its next-generation firewall appliance altering the requirements of an essential piece of networking security. The firm’s portfolio has expanded outside of network security into areas such as cloud protection and automated response. Looking ahead, Palo Alto’s nascent threat-prevention solutions will provide robust growth along with a significantly improved margin profile.

Core to Palo Alto’s technology is its security operating platform, which provides centralized security management. The ability to add technologies via subscriptions in the Palo Alto framework can alleviate complications by providing more holistic security, which can generate sustainable demand. Palo Alto will continue to outpace its security peers by focusing on providing solutions in areas like cloud security and automation. Palo Alto’s concerted efforts into machine learning, analytics, and automated responses could make its products indispensable within customer networks. Although it is expected that Palo Alto will remain acquisitive and dedicated to organic innovation, significant operating leverage will be gained throughout the coming decade as recurring subscription and support revenue streams flow from its expansive customer base.

Financial Strength 

Palo Alto is financially stable and would generate strong cash flow as it expands its operating margin profile. The company has historically operated at a loss (excluding fiscal 2012), and we expect it to turn profitable by fiscal 2023 on a GAAP basis. Palo Alto ended fiscal 2021 with $2.9 billion in cash and cash equivalents and total debt of $3.2 billion in 2023 and 2025 convertible senior notes. The $1.7 billion 2023 notes mature in June 2023 and have a 0.75% fixed interest rate per year paid semiannually, while the $2.0 billion of notes that mature June 2025 have a 0.375% interest rate paid semiannually. Palo Alto issued note hedges for both maturity dates to alleviate potential earnings per share dilution. The company announced a $1.0 billion share-repurchase authorization in February 2019, which was increased to $1.7 billion the following year with an expiration at the end of 2021, and has subsequently extended the program. Palo Alto continues to use share buybacks to return capital to shareholders, and believe that it will not pursue any dividend payouts.

The fair value estimate of $585 per share is consistent with a fiscal 2022 enterprise/sales ratio of 11 times and 4% free cash flow yield and upgraded its moat to wide.

Bulls Says 

• Adding on modules to Palo Alto’s security platform could win greenfield opportunities and increase spending from existing customers. 
• Palo Alto could showcase great operating margin leverage as it moves from brand creation into a perennial cybersecurity leader. Winning bids should be less costly as the incumbent, and we think Palo Alto is typically on the short list of potential vendors. 
• The company is segueing into high-growth areas to supplement its firewall leadership. Analytics and machine learning capabilities could separate Palo Alto’s offerings.

Company Profile

Palo Alto Networks is a pure-play cybersecurity vendor that sells security appliances, subscriptions, and support into enterprises, government entities, and service providers. The company’s product portfolio includes firewall appliances, virtual firewalls, endpoint protection, cloud security, and cybersecurity analytics. The Santa Clara, California, firm was established in 2005 and sells its products worldwide.

(Source: Morningstar )

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.