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Palo Alto Networks: The 2 Core Reasons I'm Staying Long

Dec. 02, 2018 12:40 PM ETPalo Alto Networks, Inc. (PANW)CHKP, FTNT, GEN22 Comments
DoctoRx profile picture


  • PANW reported an upside surprise to sales and earnings Thursday after the close, and guided strongly.
  • After opening sharply up Friday, PANW reversed to close down.
  • One issue that could be hurting the stock is the GAAP losses; I analyze them and present my case to consider PANW as solidly profitable.
  • My core reason to hold this name comes from the reengagement of the techie founders along with the chance that PANW's sales and marketing efforts can improve.
  • The stock is in a downtrend and is expensive and risky, however.


Palo Alto Networks (NASDAQ:PANW) operates in the cybersecurity space. I last reviewed it three months ago, after reporting on it for the first time three months before that, upon the hiring of Nikesh Arora as CEO. I've seen widely varying estimates of what the cybersecurity market size is right now and what it will grow to in 4-5 years. Numbers such as $100 B current-year market opportunity and $200 B in 2023 have been floated. That would represent about 14% annual growth, but I've also seen estimates of a 4-5 year CAGR in the 10-11% range. In any case, cybersecurity is recession-resistant, an attractive feature for any stock.

There are many very large players in the field, such as Cisco (CSCO) and other giant companies that mostly focus on other sectors within IT, or may be aerospace companies primarily with consulting arms. There are also incumbents such as Symantec (SYMC) and Check Point (CHKP). Among the larger newcomers to the field that are gaining market share are Palo Alto and Fortinet (FTNT), which is a little older than PANW and about 2/3 the size of PANW measured by sales, but has GAAP profitability. Here is a comparison of stock market performances of several comparators since PANW went public:

Also shown are an ETF for the NASDAQ 100 (QQQ) and for the S&P 500 (SPY).

The chart is busy. It shows that PANW has slightly outperformed FTNT, and both have beaten SYMC and CHKP as well as the general market.

Information about PANW and its business is found in a brief Corporate Background PDF.

The first point I want to address is why I think that PANW is solidly profitable, even though GAAP shows it losing money.

Should investors go with GAAP or non-GAAP for PANW's

This article was written by

DoctoRx profile picture
Over 40 years of investing in individual stocks. Retired physician (cardiologist). Also retired from various roles in the US pharmaceutical industry. Main focus is on growth stocks, mostly biotech and tech, but with fundamental value considerations. Secondary focus on macro trends driving asset allocation.

Analyst’s Disclosure: I am/we are long PANW, CSCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Not investment advice. I am not an investment adviser.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (22)

ErikWilson profile picture
Get out now while you can...AMZN will destroy these scammers. The bad guys are always way ahead of the security clowns. You must know that the foundation of the internet has no, nada, zilch provision for any kind of security integration. Anyone can get in and go anywhere they want and none of the cyber cops can stop them.
Now, if you want to change that then you will have start over from scratch.
Watch Dr. Steve Belovich on youtube.
In the meantime, AMZN will take over as the number one scammer... that’s what they are so good at.
Just curious. What brand aluminium foil do you find works best for a hat?
How about ZS?
cdgingrich profile picture
I'm with you, heung. ZS is much better product with much better management IMO.
DoctoRx profile picture
ZS is small, and at $40, trades at 11X projected 2020 revenue per share. Revenue projection for 2020 is $423 MM. Revenue projection for PANW for FY 2020 is $3.3 B. Not sure these are comparables or that a bull case for ZS negates a rationale to hold PANW.
Gio Graves profile picture
A data breech, positive earnings comments, and a big NASDAQ pop, and stock still trades down to the dead lows of the day? Seriously?
Gio Graves profile picture
Warning here for new money to not catch this falling knife. 2 straight positive reports and investors are dumping shares. Stock was cut in half in 2015/2016, so there was a presumption weak hands were out. But it looks to be that its significantly overvalued given the price action.
I don't think any of those stocks have been real great investments even at current prices, looking at their 6 year histories.
JSHIII profile picture
PANW's FPE is 28 so any misstep and bam this stock is getting crushed. Coupe this with the fact that tech stocks as a whole are ripe for a massive selloff in 2019 I would advise people to sell this stock in the next 3-4 weeks. 2019 is going to see tech stocks getting crushed because their EPS growth is slowing and PEs are historically high.
I strongly disagree with this assumption. If we have a recession I can see a pullback, sure. But it will take a DEpression for what you describe.
@JSHIII - pretty much agree. Maybe not 'massive' but I see a drift down now and a really slow climb back eventually. Good numbers have no positive effect and 2019 is likely risk off - overdue really.
I'm long but probably out about now - I'd be looking for and expecting sub 150 within next 4 months, could easily be worse.. Don't mind being wrong but rather not risk it.
Cambridge STR profile picture
Wow, you missed a recent event that will blow up this whole sector. Here's an example of a recent news story: "New features from Amazon Web Services aim to make cloud security easier to manage." Amazon Web Services (AWS) is going to aggressively enter Palo Alto Networks market.
Amazon is well behind in this game. And to assume they are guaranteed success in it when other players already are is foolish. If you'd like some examples of Amazon entering different areas and failing please see: www.thestreet.com/...
DoctoRx profile picture
Option007, thanks for reading and responding to WW's comment on AMZN. I agree w you. Also, is AMZN really going to provide multi-cloud security? Are they going to bother getting into endpoint protection? AMZN has tons of opportunity and cannot go everywhere.
DoctoRx profile picture
MIT23: thanks for reading and sharing your views and bringing VEEV into it as another even higher-flying SW company. FWIW, I'm more optimistic through Jan. But as you point out and as I mention in detail in the article, the technicals are weak on PANW (VEEV looks better to me technically). Lots of fundo and technical balls in the air! All my other techs are big strong dividend payers, so if they trade poorly, I can treat them as bonds and just sit tight.
The price action in Veeva and PANW was concerning..yoy comparisons will be very hard to follow next year! I understand that’s the main reason the market sold off but I still next year as the year of dead money so such names will have a very hard time outperforming the market since a long term downturn has started in the market. Love the company Palo Alto but I think the timing on it is not right..it’s too late to invest..maybe after another correction where nasdaq goes to 6500 and PANW goes to $150 while fundamentals don’t change..
I'm glad to read your analysis of the financial results.. I'm long PANW based on their superior technical execution - I believe they will be able to integrate their recent acquisitions and deliver the cybersecurity grail of a single platform to aggregate and quantify cybersecurity risks across an organization.
DoctoRx profile picture
Jaamkie, thanks for reading and your summary. You are seeing their stated big picture goal similarly to how I see it. I'm hopeful that they can succeed and produce a significant multi-year compounded growth rate by so doing.
Random Logic profile picture

When you first brought up PANW it caught my attention because I had just invested in CHKP, so I looked into PANW. By their financials I could see they were making progress so I kept an eye on them. I'm a fundamentals, bottom's up LT investor so they're 5 yr ROE, 1 yr ROE, and most recent qtr ROE of -31.7, -17.1, and -1.1 although not good, was headed in right direction. Now, after their most recent report, those same measurements show -31.7, -12.7, and -13.7. One quarter does not the future necessarily tell, but detereoration in fundamentals is not inviting. For my purposes I need to see those numbers go strongly positive.

Is it possible the founder was brought back in because they were suddenly taking on water or business wasn't scaling up as it should have?
DoctoRx profile picture
RL, thanks for reading and sharing your analysis. Your guess is at least as good as mine about the founder(s) returning. If I had to guess, and this is from a distance, the founders didn't get along w prior mgmt. JM2c! So, as stated, I'm considering this period a transition where PANW has the chance to up its game in its product/technology performance and gain from the CEO's stellar record leading Google Europe's sales effort (and his general and now vast knowledge of the tech industry). So, with the stock down from 3 years ago, I'm accepting that as you analyze, there are some holes in the story.
The key is to look at Sales and Marketing expense as an investment. Sales people are paid based on commission to grow the business year after year. If they can't do this, they are let go. When they do win new business, that business creates revenue for more than 1 contract period. This is because the marginal effort to create a renewal is far lower than the effort to get a new customer. If you take the view that as growth slows due to lower opportunities, Palo Alto will lower their S&M expense, then the company isn't as expensive as it looks. Also, Panw is FCF positive. Deferred revenue is basically income, because their product costs almost nothing to deliver.
DoctoRx profile picture
Dakness, you make several thoughtful, insightful points. Thanks for reading and sharing your thinking.
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