About Palo Alto Networks

Oddly enough, one of the world’s largest, if not the largest cybersecurity company is only recently starting to get some attention from the pundits. While there are a lot of big names in the technology sector as a whole, we hardly ever hear or see research done on the cybersecurity sector.

From our perspective, the current leader of the cybersecurity space is a Santa Clara-based Palo Alto Networks (NYSE: PANW).

The company was founded in 2005 by an Israeli entrepreneur by the name of Nir Zuk, who apparently was responsible for a lot of the company’s original operations and product development. Zuk is still a member of the board of directors for Palo Alto Networks however the company’s current chief executive officer (CEO) is former president and chief operating officer of SoftBank, Nikesh Arora.

As previously mentioned, the company’s bread and butter is cybersecurity.

They run a platform that employs hard-to-hack firewalls in order to prevent hackers and other bad actors from hurting or negatively impacting its customers in any way. The company also has some other technological security products however the core of their business is cybersecurity through firewalls and other prevention tools and platforms.

At MacroHint, there’s not a doubt in our minds that even outside of times of war (namely, involving Russia and Ukraine) the demand and need for trusted and reliable cybersecurity solutions will be crucial for any company or business’ success.

There’s a lot that bodes well for Palo Alto Networks, however let’s get a better idea of whether the stock is fundamentally sound and worth considering adding to your portfolio.

Palo Alto Networks’ stock financials

First, it must be mentioned that the company’s stock has had quite an impressive rise over the past five years, trading as low as near $116, steadily climbing to as high as nearly $630. Simply looking at the chart, one would likely wish they would’ve picked up a few shares of Palo Alto Networks after the company became publicly traded in July 2012.

Nonetheless, let’s dig into some of the more technical aspects of Palo Alto Networks’ financials.

For instance, the company maintains approximately $10.2 billion in total assets and about $9.6 billion in total liabilities according to their balance sheet. We should also specifically note that while we hoped that the company’s total liabilities is mainly comprised of long term debt (which is generally easier to manage), this is not the case for Palo Alto Networks.

Specifically, according to the company’s balance sheet only around $5.1 billion of their total liabilities is considered current (meaning short-term financial obligations/debt, usually outstanding debt that the company is obligated to pay back within a year). Thus, the rest of the company’s total liabilities is what we consider to be around $4.5 billion in long-term debt.

This isn’t the most favorable tilt. In other words, it would be a lot more assuring if the company had more long term debt than short term debt.

Objectively, it would be quite reasonable for prospective or current investors to be concerned about the company’s relatively high level of debt, especially since a majority of it appears to be on the side of unfavorable tilt, to the shorter term.

However, given some of the research we’ve done on the company (outside of the numbers) we are confident that Palo Alto Networks will be able to keep debt at manageable levels, as they’ve seemingly done in the past. From our perspective, this company is in the process of exiting “cash burning growth mode” and is now fully evolving into a mature, cybersecurity giant.

At the end of the day, from our perspective the company’s total liabilities will likely not have a major negative impact on operations and performance going forward. However, investors should always determine or at least get a better idea of whether or not a company is managing its debt properly or drowning itself to the point of bankruptcy.

Onto the income statement, Palo Alto Networks’ total revenue has shallowly increased each year since 2017. When some investors hear “shallow,” they usually scoff and want massive growth.

We don’t.

We want companies that have strong track records and potential moving forward. It would be pretty much pointless to want a company to have an amazing quarter and in the subsequent quarters, nothing for investors to be excited about.

Therefore, Palo Alto Networks’ revenue growth over the past five years is exactly what we like.

Around $1.8 billion in total revenue in 2017, the company’s total revenue has since increased each year up to approximately $4.3 billion in 2021.

Onto the last of the financial big three, Palo Alto’s cash flow statement shows the company’s net income in the red each year since 2017.

We have zero problems with this.

From an objective lens, the company appears to be continuously reinvesting in itself, other companies (maybe acquisitions of other small companies) as well as putting money into new products or projects that have a high likelihood of paying off in the long run.

Palo Alto Networks’ stock fundamentals

Let’s take a look at Palo Alto Networks’ ability to make a profit from their revenue.

The company’s annual net profit margin isn’t very exciting; in fact, it’s somewhat disheartening at first glance.

For example, their trailing twelve month (TTM) net profit margin currently sits at -9.50% to the industry’s 18.64%, according to TD Ameritrade’s platform. Oddly enough, while we’d obviously love if the company’s TTM net profit margin was higher than that of the industry (let alone positive), we predict that as the company continues to establish itself as an industry leader in the cybersecurity sector, their ability to turn a profit will get closer and closer to net positive on annual basis.

This is simply what tends to happen as a company emerges into its position as a leader in any industry.

However, if the company’s total revenue numbers were decreasing or flat over the past five years, we’d have a completely different perspective on Palo Alto Networks. However, with demand comes more opportunities to profit from past, current and future growth.

Acquiring companies and customers plays a major role in the pursuit of profit and Palo Alto Networks seems to be very good at both.

Specifically, some of the company’s customers as touted on their website include Dish Network, Salesforce, Accenture and oil and gas giant Schlumberger.

These are huge, important companies.

From our perspective, this is likely only the beginning of Palo Alto Networks’ major customer base.

In addition to gaining formidable, well-known customers, the company is also good at scooping up valuable companies in order to accelerate its non-organic growth.

For instance, according to some sources the company has acquired sixteen cybersecurity-related companies since 2014. One of the most assuring things we’ve identified when looking at the list of companies owned by Palo Alto is that they fit extremely well and in some ways are complimentary to Palo Alto Networks’ core business model.

From buying startups such as Twistlock and PureSec to more mature companies such as CloudGenix and Demisto, all of the lines of business and core competencies each of these companies has, Palo Alto stands to gain from their strategies, customers and intellectual property.

Even as a relatively young company, Palo Alto Networks knows how to make strategic acquisitions.

Ultimately, as it relates to profitability we think Palo Alto Networks has many, if not all of the tools it needs to get closer and closer to making steady, solid profits in the long term.

The rest of Palo Alto Networks’ current supplementary metrics sing a similar tune to that of their current profitability; not especially encouraging.

Specifically, their trailing twelve month return on assets and investment are both considerably lower than that of the industry average.

Again, this is not surprising given the current stage of the company. However, given that this is the state of the current financials right now, the company is somewhat of a riskier company to own stock in.

However, as previously mentioned, the demand for an industry leader such as Palo Alto Networks is here and likely won’t go away until the end of time.

Should you buy Palo Alto Networks’ stock?

Palo Alto Networks has a fantastic business model, very strong assets and intellectual property, and mediocre financials.

While it’s incredibly important to have as much trust and information in a company as possible, we see this as an industrywide opportunity more than just a single company opportunity.

However, we have no doubt that Palo Alto Networks is already at the top of the industry and will stay further and further ahead moving forward.

Given all of this information, we give the company a “hold” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.