Is Palo Alto Networks the King of Cyber Security?

November 23, 2022
Information Technology

Price Target: $205 (22% upside)

Current Price: $168

Target Date: Q4 2023

Stock: Palo Alto Networks ($PANW)


Gosh, we really love it when things just go according to plan.

The market loves it even more, apparently — because in the past 6 months our cyber security holdout Palo Alto Networks ($PANW) has simply consolidated around their core business, leading to massive revenue and margin gains that the market absolutely loves.

And after a year of pain, PANW is emerging as the king-maker conglomerate in cyber-security.

That’s because Palo Alto Networks absolutely CRUSHED their revenue guidance in their earnings call last week, and we’re finally seeing trends emerge that will make them the top player in their space.

A few strategic acquisitions later, PANW is finally convincing the market that its revenue and profit growth is no joke.

So how have they kept the growth up? Let’s get into it 👇

2022 In Review:

So what happened here?

  • Big deals add up to a big win. Palo Alto Networks grew revenue 27% YoY (year-over-year) on the back of some genuinely blockbuster deals. PANW is becoming the leader in enterprise deals. Their deals making 1 million dollars or more is up 20% YoY — driving a massive amount of their growth. There is definitely a little concern when you look at that figure, as 27% revenue growth is down from their 32% growth from Q3 of 2021. However, PANW has stayed steady in the high 20% range in terms of revenue growth — so we see this as more PANW finding its level than growth declining.
  • Hybrid Cloud was the right bet. A huge part of PANW’s growth is coming from their Next-Gen Security vertical. One huge highlight is their massive 9-figure agreement to service the DoD with their cortex service. PANW’s hybrid verticals are growing at 68% YoY and showing signs they could only accelerate. That’s why we think that PANW is one of the best on-prem to hybrid cloud transformation stories in software history with over 40% of PANW’s billings now being generated beyond the firewall.
  • Expenses are completely under control.  While PANW’s revenue may be going down, they are also keeping their expenses under tight control. Their total expenses increased 38% last year, but only increased 21% this year. Essentially, PANW is nailing the software dream of maintaining revenue growth while making each individual dollar work even harder as they consolidate their business.

PANW is also giving us a lot to be excited about with their acquisition — their next-gen security vertical is getting further serviced by a $300 million acquisition of Cider Security.

Cider is all about giving engineering teams a cohesive view of their entire software landscape and this style of system will slot in brilliantly with Palo Alto Networks’ other offerings to expand their moat even further.

This is because Cider helps companies with something confusing called “supply chain cyber security”.

A supply chain attack has become a pretty common way to break into digital systems and PANW entering the space essentially allows their sales team to feast on a whole new vertical.

 

PANW Outlook:

It’s all about maintaining growth from here. But not just revenue growth — it’s about earnings growth as well.

And in the next segment of its lifecycle, PANW is going to be focusing on EBIT growth in addition to top-line growth.

And even though we saw over 40% EBIT growth — their management is driving confidence for investors that they’ll be able to continue to boost the bottom line if the macro environment slows down topline substantially.

And that’s why PANW’s stock has been exploding lately. This combined with the fact that the company announced that they are also raising guidance for the next year to 22% instead of just 20% — has investors thrilled.

Palo Alto Networks is accelerating its growth and demonstrating that multiple blockbuster products are the best way to explode as a recurring revenue business that is trying to keep costs under control.

 

PANW Price:

So with all of this information, you would think PANW would be crazy expensive? Think again.

That’s because at 14x their 24′ FCF — they’re actually looking pretty cheap!

This is because the stock has actually underperformed the broader software industry since their last quarter’s earnings results. And that’s why their current EV/FCF multiples (relative to growth) look better than anything we’ve seen in the last few years. With conservative projections, we think the upside for the stock is clear.

Frankly, being consistent and maintaining growth in this economy is a huge win, so you’ll likely see more value-centric investors flood PANW and push the stock price higher too! That’s because we believe investors will all collectively realize we may be getting a temporary discount on PANW stock.

So when factoring in this outlook paired with their 2021 numbers, we’re continuing to love the stock and think they’ll outperform the market over the next few years!


Rating: Overweight

Risk/Reward: Medium/Medium

Dividend Yield: 0%

Market Cap: $51B

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