Why This Cyber-Security Stock Is Ready to Rise In ValueAug 25, 2021
Roughly a year ago we wrote about Palo Alto Networks. Back then they were trading around $260 and today they're near $440. If you listened to us back then, you would have enjoyed a nice 70% gain in just under a year! However, it is not too late to hop aboard the Palo Alto Networks bandwagon.
This is because what we said then, still rings true today. And that is:
- Total billings are still growing fast - even faster today than they were last year! A year ago they were up 30% YoY (year-over-year) and today they're at 34% YoY growth. Seeing a company of their size, increase their billing growth, is highly unique and extremely encouraging.
- Their firewall platform also grew faster this year than it did last year! A year ago the platform grew at 20% growth YoY and today they're at at 26% YoY growth. Again similar to the above, this increase in growth rate is extremely positive.
While there are more factors described below, overall, Palo Alto Networks is a stock we've loved for years and we're truly excited to tell you where we think the stock can go next! Let's explain it in more detail below:
As we mentioned in our week ahead analysis earlier this week, we believed this earnings call could be the catalyst needed to push this stock up in the right direction. We forecasted an all around beat on expectations as last earnings call they also outperformed on revenue, EPS (earnings per share) & EBITDA (definition of this at the bottom of the page) and the numbers referenced above.
We will pause here to bask in our glory... 😂😂
But on a more serious note, the financials and growth story for Palo Alto Networks are insane.
The numbers above really tell the story here.
Growth at a company of their size is pretty unique and the fact that they're churning out more growth YoY is quite impressive.
But more impressive then that are the expectations going forward. The most exciting expectations are:
- Management's recent comments around their Next-Gen Platform finally being close to complete. This will allow PANW to slow down M&A activity and more solely rely on their internal R&D team too churn out new innovation. This should lower costs significantly and create more consistent output. This will be the key to them outperforming in the long term. M&A, while it can be beneficial, is often a short term bandaid that doesn't pan out.
Palo Alto Network's Expectations:
The other key factor is that they just crushed their earning expectations and the company raised guidance for earnings for the years 2022 and beyond. This increase in guidance also has us truly excited for what's next. Some of those expectations are:
- 50% YoY growth in SASE customers and 45% YoY Growth in Prisma cloud customers (85k total customers today).
- Further increasing sales projections for fire-walling functionality.
- Scaling out more talent at the management level to bolster their salesforce.
The key takeaways from all of this, is that their current price leaves room for them to increase substantially in value. When looking at their current projections, based off of their stock price, we see sales numbers that are no longer up to date. Looking across expectations, we feel that billings growth and other key metrics should be substantially higher than what they currently are.
We believe this is largely being missed by the market!
Due to our increased forecasts across the board, we are updating our price target as we believe they'll continue to outperform expectations.
The output of this increase, results in a price target of $540. This price target was derived from our DCF (discounted-cash flow) model. Please message us if you have questions on what this is here: [email protected]
Price Target: $540 (23% upside)
Target Date: Q1 2022
For those of you unfamiliar with the term, EBITDA stands for earnings before interest, taxes, depreciation & amortization. If we lost you, this is basically the number that reflects the "true" net income of a company.
This number is often more important than net income because of two reasons. The first is:
- A lot of the expenses in net income are non-cash charges. What this means is that depreciation & amortization aren't "real" expenses. There is nothing to pay out of pocket per-say. But companies use this non-cash charge to lower their overall income. Lower Income = Lower Taxes. And this is something every company is trying to do in order to not pay taxes. Therefore we like to view earnings before D&A (above) in order to see what their real income truly is.
- The second reason is because interest & taxes are often arbitrary numbers. As we explained above, many companies strategically use D&A in order to lower their tax bill. Because taxes can be artificially inflated or deflated, we try to see earnings before taxes in order to gauge the true health of the business. The same goes for interest, due to the companies ability to alter their debt.
Therefore we like to use EBITDA as a companies true measure of net income. Many financial analysts view net income as a "fake" number.