Right now, Palo Alto Networks (NYSE:PANW) looks like the cloud security winner — and that’s great for PANW stock.
The call is tentative, though. New algorithms, new concepts and new threats can overturn a market lead quickly. But, as it stands, the momentum is on Palo Alto’s side — and investors are buying PANW stock.
Palo Alto opened for trade August 26 at $261 per share. That’s a market capitaliztion of about $25 billion for a company that just reported sales of $3.4 billion, for fiscal year 2020. Additionally, there was a GAAP loss of $267 million on those sales, but non-GAAP income of $484.6 million — or $4.88 per share.
Thus, 22 of 28 analysts at Tipranks are screaming buy. And shares currently has an average price target of about $298, 13% higher than the current price.
So, is PANW stock worth it? Let’s find out.
The Secret Sauce
Overall, Palo Alto’s software is described as a “next generation firewall.” And unlike older products that protect the perimeter of the network, Palo Alto creates IDs around apps, content, users and devices — both inside and outside the network. That means it can protect not just internal resource,s but also Software as a Service (SaaS). It’s a concept called Secure Access Service Edge (SASE), and the approach makes Palo Alto a “work from home winner.”
It helped drive revenue growth of 18% this past quarter, which CEO Nikesh Arora believes is sustainable. In fact, the Gartner (NYSE:IT) “magic quadrant” has Palo Alto in the upper-right leader position for next-generation firewalls.
Beyond software, though, Arora is also part of Palo Alto’s secret sauce. He was once seen as heir apparent to Masayoshi Son at Softbank (OTCMKTS:SFTBY). However, is key years were spent at Alphabet’s (NASDAQ:GOOGL) Google, where Eric Schmidt called him “the finest analytical businessman” he had ever met.
Moreover, Arora’s latest splash is the Crypsis Group, a digital forensics outfit Palo Alto is buying for $265 million. And while Palo Alto’s software can predict and prevent most attacks, Crypsis can mitigate the effects of successful attacks — and that knowledge can then go back into Palo Alto products.
Palo Alto is also turning its security orchestration system into a marketplace, with add-in packs that turn its customers into re-sellers. That said, knowing that you don’t know it all is the key to wisdom.
Bet on the Leader
Tech markets are like the NBA Playoffs: win or go home. A market leader often gets 90% of the industry’s profit, the second-place finisher 9% and everyone else scrambles for what’s left.
On that note, Palo Alto’s leadership caused Deutsche Bank to initiate coverage at a buy rating this month. Additionally, Generation Investment Management — the fund run by former Vice President Al Gore, has been buying Palo Alto while selling cloud communication leader Twilio (NYSE:TWLO).
Now, more analysts are now pounding the table for Palo Alto. They see things like the recent Twitter (NYSE:TWTR) hack, in which thousands of celebrity credentials were stolen, requiring the Palo Alto cloud approach. The shares still trade at a reasonable level, compared to next year’s expected free cash flow. However, you pay up for quality.
The Bottom Line on PANW Stock
Collectively, when it comes to technology, you bet the jockey more than the horse. That said, Nikosh Arora is a good jockey, and Palo Alto is a good horse.
It had nearly $3 billion in cash at the end of July, which means Arora’s shopping shouldn’t dilute your shares. And it seems to have the right approach for the current computing environment.
Nonetheless, the normal caveats remain. Security software is not an easy business. Intel (NASDAQ:INTC), Cisco Systems (NASDAQ:CSCO) and many other big companies have splashed out cash and come up dry here. It’s a field where the crown hangs heavy, where trends can change quickly and where bad guys can destroy reputations in a flash.
All that said, though, if you’re buying computer security stocks, Palo Alto is your best bet right now.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in INTC.