PANW beats and raises.

Kind of an important earnings report for the board as PALO Alto is one of the cyber security leaders. Surprised no one posted this last night when they announced. Just more confirmation on the sectors ability to grow through this downturn, or whatever it ends up being labeled.

PANW beat and raised and also announced a stock split. Up over 11% right now.

“Palo Alto said it expects 2023 revenue in a range of $6.85 billion to $6.9 billion. Palo Alto forecast billings in a range of $8.95 billion to $9.05 billion. Analysts projected revenue of $6.74 billion and billings of $8.56 billion. That correlates to respective growth of roughly 23% and 20%.

“The company is taking market share in the traditional firewall market as well as benefiting from strong innovation-led solutions in cloud and SASE (Secure Access Service Edge) security,” said William Blair analyst Jonathan Ho in a report.

In fiscal 2023, Palo Alto said it expects next-generation annual recurring revenue of $2.625 billion, up 38%, vs. estimates of $2.46 billion.”

TMB

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On top of the PANW earnings, CRWD also issued the following press release yesterday:

https://www.crowdstrike.com/press-releases/crowdstrike-named…

CRWD was named as “a winner in the Best Security Company category for the 2022 SC Awards US.” This is its fourth time in the last five years to take home the reward, which was described as “outpacing all other vendors in the industry.”

So good news day for CRWD yesterday.

BTL
@LaneyLawyer
Long CRWD

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Looking at PANW, a more mature company, growing at a slower but steady pace, and a lower valuation then the hyper growth names, I can’t help but think that a more moderate growth play like this just might continue to outperform the higher growth, higher valuation names.

YTD up about 14%, including today’s gain.

One year up about 60%.

Not sure beyond that, but eyeing a chart, PANW might be in its second year of outperformance over the hyper growth names. Will that continue? I’m not going to rule it out. The appetite for hyper growth has at least lately.

TMB

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Looking at PANW, a more mature company, growing at a slower but steady pace, and a lower valuation then the hyper growth names, I can’t help but think that a more moderate growth play like this just might continue to outperform the higher growth, higher valuation names.

YTD up about 14%, including today’s gain.

One year up about 60%.

Hi Tryingmybest,

I am getting different numbers, and differing opinion of valuation here.

PANW next FY guides for 113m shares.
It therefore sports a $64.3B market cap at today’s close price.
They reported ARR $1.89B, which grew at 60% (as of quarter end 7/31/22). They expect $2.65B in ARR at 40% growth next FY.
They expect 6.9B total rev at 25% growth next FY.
If we back out the subscription/recurring rev portion, maybe 4.6B of the next FY total rev is coming from their hardware based NON-recurring revenue business?

Now let us check on CRWD to compare.

CRWD guided end of this FY at 241m shares.
It therefore sports a $46.4B market cap at today’s close price.
They last reported ARR $1.92B, which grew at 61% (as of quarter end 4/30/22).
I’d expect maybe (???) $3B ARR at around 50% growth in four quarters.

Note that CRWD is a pure SaaS company, unlike PANW.
So let’s compare valuations.

We see CRWD has perhaps 15.5x forward price to ARR ratio.
Note CRWD has possibly superior gross margins at 77%, and PANW’s ARR is definitely slower growing.
That means PANW’s ARR might have a ~10x forward multiple. This implies PANW ARR could be worth $26.5B alone.

Subtract that from PANW’s current total market cap of 64.3B. That means the hardware based, **NON-**recurring revenue portion of PANW’s business is right now worth 37.8B, against expected rev of 4.6B, which is 8.2x forward price to sales, growing at less than 20-25% YoY. On the surface, that doesn’t seem “cheap” to me for the non-SaaS, hardware based business portion.

Now I am NOT an expert on PANW at all, but I am aware they made some huge acquisitions over the last couple years. How much of the growth is organic currently? Do we expect them to have to acquire more companies to prop up their future growth? And if they need to acquire in the future, do they have enough cash anymore or too much debt and would have to dilute shareholders to do it?

Finally, regarding your statement that PANW stock is up 14% YTD as well as 60% one year, I am calculating it is actually +2.3% YTD and 53% one year return (and it might fall to 29% one year return tomorrow, when it laps one day after the gap up of Aug 23, 2021)

Anyway, again I am not an expert on PANW, hopefully they continue to deliver great business and share price returns in the future for any holders, but want to put my opinion out here that it isn’t as “undervalued” as one might assume.

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Hi Jonwayne,

your analysis is interesting, as always.

But when comparing CRWD’s and PANW’s ARRs, I don’t think they look that different to deserve such different multiples (15.5x vs. 10x). First of all, their ARRs just grew pretty much at the same rate (61% vs. 60%). Second, PANW’s guide for FY23 is for a 40% growth Y/Y, but this is certainly a conservative assumption, as it is the first yearly guidance for FY23 that they give. I wouldn’t be surprised if they end up growing their ARR by 50% in FY23. If that’s the case, their ARR will probably come out somewhere around $2.83bn for the year (at the end of the day, just less than $0.2bn higher than the top of the range of their $2.65bn guidance). Third, their gross margins are not that different: PANW’s subscription GM is 76% (this includes “support” as well, so probably the “pure” subscription GM is higher than that), while CRWD’s is 78.7%. They are not dramatically different.
All in, I would personally give PANW’s ARR a multiple higher than 10x. Maybe not in line with CRWD’s 15.5x, but I don’t see any reason for not giving them something close. Say, 14x.
In this scenario (which is totally arbitrary, as it’s your 10x – we’re speculating here), the recurring revenue business would be valued approximately $40bn. This would leave $24.4bn of residual market cap for the rest of the business ($64.4bn - $40bn). They are guiding total revenue for FY23 at $6.9bn (top of the range), so, by adding the increase in ARR as per my estimate ($0.2bn) and therefore making that total revenue guide $7.1bn, the “non-ARR” revenues would be approximately $4.3bn, for a multiple of about 5.7x.

Now, that might or might not be considered cheap. It depends on many factors. But this is just an example to show how valuation is totally arbitrary and subjective.

I’m personally invested both in PANW and in CRWD, with sizeable positions (higher than 10%). I think the security space deserves to be well covered in a high-growth portfolio (I also own S and NET, plus a few other hyper-growth ones – 10 positions total). I find PANW to be a company that is rapidly changing its skin in the space and that the “right” part of their business is growing nicely and becoming an increasingly larger portion of the total. Lastly, I find it gives stability to my portfolio as it’s not as volatile as the hyper-growth stocks.

My two cents.
Ciao

Silvio

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Silvio,

I agree a lot of valuation is totally arbitrary. But can be helpful as a personal exercise to really show to yourself if something is “low valuation” or not

Something I want to point out is that PANW had just reported 7/30/22 quarter end, and I was deliberately comparing that to CRWD’s 4/30/22 quarter end because we don’t have their 7/30/22 numbers yet.

A fairer comparison would be to match the two quarter report ago PANW ARR (Q3): they had 1.61B, which is already 20% smaller scale than CRWD’s at the same calendar date point.

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Jon–
Fair point.
However, It doesn’t change the picture much, as for the quarter ended 4/30 PANW reported $1.6bn in ARR vs. CRWD’s 1.7bn. Most importantly, PANW’s and CRWD’s ARRs grew pretty much at the same rate Y/Y (65.2% vs. 64.9%) in that quarter.
So, both quality-wise and size-wise, I would still consider those two ARRs very much in line for the purposes of an hypothetical valuation.
S.

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Sorry, I made a mistake. My bad.
I confused CRWD’s Q1 (Apr) and Q4 (Jan).
When apple to apples are applied, you’re right, it is indeed a sizeable difference ($1.9bn vs. $1.6bn) in terms of size.
Growth-wise, however, they are comparable.
S.

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Silvio,

They are somewhat similar but I think you still have the wrong ARR for CRWD, they had 1.92B, not 1.7B for 4/30 (vs PANW 1.61B)

John
I stand corrected on the gains YTD, I was looking at the return as if it was the day before earnings number, and then mistakenly adding yesterday’s move. Still, 52% one year gain is impressive.

The board likes to look at large customer growth when analyzing the hyper growth names. PANWs is also pretty impressive.

“Deal activity during Q4 was robust, and large deal momentum continues to surge with more than 1,200 customers spending over $1 million annually, up from 986,000 in Q4 2021," said Cowen analyst Shaul Eyal in a report.”

PANW is expanding is cloud business. At the same time I don’t think a subscription based business model is the only game in town. Many other ways to make revenue, and actually some that even show a profit.

So I’m impressed with what PANW is doing.

TMB

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No disrespect to John who is a great addition to this board and always has insightful posts, but I must agree with Silvio and TMB here.

I have been following and own both for quite a while and also happen to be the Tickerguide for PANW, so maybe I am a little biased but I really think you are underestimating PANW here, John.

I will wait for CRWD’s latest quarter before I do a detailed comparison but you can look at my past posts which do have back to back comparisons to see that PANW has been putting up great ARR growth numbers that compared very well with CRWD’s growth. It will be interesting to see if CRWD can beat PANW’s 60%. In any case I wouldn’t give CRWD any advantage on growth rates. Yes, they are maybe 20% higher at the moment. Hard to tell if that shrinks or grows. PANW has only focused on their Next-Gen Security in the last few years but despite their competitors saying you have to start from scratch, they seem to continue to do well, qtr after qtr.

In addition, both sides of this business is very profitable. Earnings were $2.39/share for the quarter and were 50% higher than last years qtr. The free cash flow was almost 1/2 Billion dollars!!! Margin improvements have been very consistent over the last few year and they have a lot of money to keep pushing in the cloud based SAAS portion of their business.

Finally, the most exciting part to me is that the baseline business is growing (and that is both a software and hardware business based on fire-walled systems) but that as the Cloud portion grows, the overall growth should continue to improve as a bigger and bigger portion of the company will be SAAS. The market should reward them for that.

All of that is why PANW’s stock price has held up much better than the cloud only based companies in the last year or so. Whether that continues is anybody’s guess. BTW, if you would have done the value comparison a year ago (which I did on these boards) you would have found that you were getting the baseline firewall business almost for free back then.

In summary, I will say that putting a portion of your cyber security position in PANW as well as CRWD seems to take a bit of risk out of having to pick a winner and PANW has a very good chance at being the better long term investment in any case.

Just my 2 cents.

Randy
Long CRWD and PANW as well as PANW Tickerguide

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interesting and timely discussions…

one side point to consider:
during pandemic, enterprises had to shift IT spend heavily for WFH and that meant more for cloud and on-prem IT spend suffered…

in 2022, we see this a bit reversed - while cloud names have tough comp, the growth has sustained… on-prem IT spend is raised as employees back into office and need to catch up on two years of neglect of on-prem infrastructure…
this is reflected in sizable revenue for on-prem HW (& SW)… for PANW and also for other names… PSTG, IBM… many others… including our favorite MDB who keeps gaining on-prem license renewal…

This phenomenon, I believe is transitory (ahem!!)… not sure if I would call this a last hurrah for on-prem but certainly, 2023 will see significant drop in on-prem spend while cloud accelerates…
(this might even happen in 2nd half of this year)…

So the point it, I would be extremely wary of linearly extending any company’s on-prem IT gain this year to next year… this is why I never get onto PANW… you just dont know when the shoe will drop… and it will!

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I feel like this has come up before, and I could be misinterpreting.

one side point to consider:
during pandemic, enterprises had to shift IT spend heavily for WFH and that meant more for cloud and on-prem IT spend suffered.

Is the above really true? Because I’m nearly certain the next statement is true: WFH can and is readily done with on-prem. (e.g., connect securely to on-prem data center or connect securely to public cloud data center)

Cloud might be long-run cheaper after switching costs but WFH does not mean companies “had” to up cloud spend or does not imply heavier cloud spend is required.

WFH could accelerate cloud spend because maybe some new infrastructure and software was required and might as well go cloud (vs on prem) with new spend because cloud just makes more sense for certain new spend. So maybe in this sense WFH accelerates cloud.

Would like hear clarifying views on above.

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I agree, good discussion and an Interesting theory Nilvest and it is always good to put numbers in context.

In this case however. I don’t recall a drop off for the firewall business during Covid or a burst of business afterwords. It seems like it has been growing all along.

And to be clear the 60% growth is the SAAS cloud business. The 27% growth was the business overall. Both numbers have been consistent throughout.

Randy

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