Summary:
Palo Alto Networks Inc. (NYSE: PANW), a pioneer and leading player in the cybersecurity space, presents an attractive long-term investment opportunity given its comprehensive security platform, innovative product pipeline, strategic acquisitions, and impressive financial performance. Cybersecurity, being a high-growth industry, further enhances the appeal of Palo Alto Networks, especially with the increasing prevalence of cyber threats and the growing demand for advanced cybersecurity solutions.
Company Overview:
Palo Alto Networks Inc. is a multinational cybersecurity company known for its comprehensive suite of security products encompassing network security, cloud security, endpoint protection, and advanced threat intelligence. Since its founding in 2005, Palo Alto Networks has built an impressive customer base that includes over 85 of the Fortune 100 companies and more than 63% of the Global 2000.
The company focuses on 5 key areas of cybersecurity:
Network security
Products here include physical, virtual, and cloud-delivered firewalls. In addition, Palo Alto Networks offers add-on security services that enable customers to secure their content, applications, users, and devices across the company’s network security platform as well as Prisma and Cortex product lines. The Panorama management platform allows customers to centrally monitor Palo Alto’s network security platform regardless of form factor, location, or scale.
Secure access service edge
Prisma Access is Palo Alto’s cloud-delivered security offering that helps organizations deliver consistent security to remote networks and mobile users. When combined with Prisma SD-WAN, Prisma Access offers a security solution for customers to better secure their remote workforces.
Cloud security
This segment includes “cloud native” security products designed for both hybrid and multi-cloud environments — think built from the ground up for cloud computing. The primary offering on this front is Prisma Cloud, which provides security and compliance insights. The platform uses machine learning to profile user, workload, and application behaviors to identify and prevent advanced threats.
Security operations
Products include endpoint security, security analytics and security automation solutions delivered via Palo Alto’s Cortex portfolio as software as a service (SaaS). Wall Street tends to reward subscription-based offerings with a higher multiple due to the sticky and recurring nature of these revenue streams. The portfolio includes Cortex XDR, Cortex XSOAR, and Cortex Xpanse.
Threat intelligence and security consulting (Unit 42)
In addition to a slew of product and software subscription offerings, Palo Alto offers “up-to-date threat intelligence and deep cybersecurity expertise before, during and after attacks” through its so-called Unit 42 threat research and security consulting team. Unit 42 offers incident response, risk management, board advisory, and proactive cybersecurity assessment services.
Taking all of these segments together, Palo Alto Networks is a company capable of delivering on every aspect of cybersecurity under one roof. Once Palo Alto brings a new customer into its installed base, it can then leverage that relationship to cross-sell additional products to enhance protection or to consolidate its systems into a single platform.
Investment Thesis:
We believe Palo Alto Networks is well-positioned for robust long-term growth due to the following factors:
Comprehensive security platform: Palo Alto Networks' broad portfolio of products caters to diverse cybersecurity needs, positioning it well within the industry.
Growth of the cybersecurity industry: With cyber threats becoming more complex and frequent, the demand for advanced cybersecurity solutions is expected to surge, benefiting leading players like Palo Alto Networks.
Industry Analysis:
The global cybersecurity market is projected to grow at a CAGR of approximately 10% over the next five years, reaching over $300 billion by 2027. This growth is driven by the increasing prevalence of cyber threats, the digital transformation of businesses, the rise of remote work, and the growing need for regulatory compliance. Goldman Sachs says they expect "secular tailwinds in security to drive budget growth ahead of broader information technology (IT) spending and broader software over the next decade.” Goldman believes security will continue to take share of total IT and software budgets for three reasons:
Security consistently screens as the first priority for investment in Goldman’s bi-annual survey of chief investment officers.
Companies need to continue to invest in leading-edge technology to defend against threats.
The evolving threat landscape has grown increasingly complex as more companies increase digital transformation projects.
Competitive Advantage:
Palo Alto Networks has several competitive advantages, including:
Comprehensive and innovative product portfolio: The company's broad and cutting-edge product offerings help it cater to diverse cybersecurity needs.
Strong brand reputation: Palo Alto Networks is a trusted name in the cybersecurity industry, with a large and growing customer base.
Strategic acquisitions: The company's acquisitions have helped it enhance its product capabilities and expand into new areas.
Global reach: Palo Alto Networks has a broad geographic footprint, serving customers in over 150 countries.
Price target
We have a 2025 price target for PANW at $280/share. The company is expected to earn $7.19 in 2025, compared to $6.22 in 2024 represents a 15.6% EPS growth. We want to apply a 2.5x PEG ratio to this earnings growth, which makes a reasonable 2025 PE ratio for PANW at roughly 40. PANW direct competitor, Crowdstrike, is currently trading at 2.5x PEG ratio, so we believe it makes sense to apply the same ratio to PANW.