Palo Atlo Networks (PANW)

I new position for me in the last week is Palo Alto Networks (PANW).

Revenue growth rates:

2016 55 54 48 41
2017 34 26 25 27
2018 27 28

Non-Gaap EPS

2016 0.35 0.40 0.42 0.50
2017 0.55 0.63 0.61 0.92
2018 0.74 0.86

1st 6 months of this year

Rev. 1048 vs 821 (+28%)

operating expenses up only 17%

CFFO of 518 vs 418 (49% of revenue)

FCF of 460 vs 352 (44% or revenue)

What I like:

Leader in growing cyber security market
rev. growth acceleration the last 2 quarters
$2 Billion of deffered revenue
founder led
beat and raise every quarter
FCF as % of revenue above 40%

The revenue growth rate, accelerating the last 2 quarters, in combo with the FCF % in excess of 40%, tells me they have a large and growing TAM with a competitive advantage.

What I don’t like:

the share based compensation

Jimbo

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They are a leader, although Cisco Security is a serious competitor. Both have a broad offering and compete against “point products” which are security companies focused usually on specific niches.

Legacy success for PANW is in classic physical firewalls. They want to grow in cloud and endpoint security.

Cloud is key because public cloud via AWS and Azure is expected to continue. So less on-prem spend means less classic firewalls are needed. Thus the need to offer cloud security solutions.

This is a good link to understand, at least for AWS, on how the shared security model works…what public cloud clients are still responsible for when it comes to security: https://aws.amazon.com/compliance/shared-responsibility-mode…

PANW has had a great run lately and is not small or unknown anymore. I would rather get into a stock like ZS but it IPOd too hot. Security, as a market, should only grow for decades, imo.

4 Likes

Dreamer-

Thanks for the info on PANW.

I want a 25% return so I am looking for companies that have a high probability of doubling in 3 years.

What I see in PANW that gives me some confidence it can do this:

I think its fairly valued to under valued right now with a P/S of 8.5.

So I want revenue to grow by greater than 25% (which is a double in 3 years).

Currently growing faster than that at 28%, and trending up slightly, and deferred revenue of $2 Billion is up 32% over last year.

I think they are in a growing market, so the question is do they have enough available market left to keep growing by greater than 25% without getting disrupted by competitors?

Right now I think so.

Thanks,
Jimbo

5 Likes

Jimbo

I’ve held this stock for several years now and have referenced PANW here and on NPI together with other cyber security stocks and have played the ups and downs to a degree.

Whilst I’m glad of the company as it has been a lonely ride with PANW on this board, what I would say is:

  1. You are getting in at the top
  2. In waiting until now you have de-risked yourself of the potential banana skin slip up in the transition to a subscription model
  3. Yes SBC is still high and many detractors point to the ongoing GAAP loss
  4. The billing levels and the forward contracted revenues in hand are amazing
  5. There is an investor decision to make over whether you believe a platform vs point solution is the direction of travel for the industry. The over-riding narrative is that it is but the reality is point solutions share price have performed much better of late.
  6. PANW may have made the transition to a subscription model successfully but they have not transitioned to the cloud and remain much in the on premise world nor are they in a hurry to accelerate to the cloud

It took a lot of investing strength to stick with PANW whilst everyone including Bert was slamming this company. Still PANW has been good to me - I’m up 185% on the stock.

Ant

8 Likes