Palo Alto Networks (PANW 3.87%), one of many largest cybersecurity corporations on the earth, went public 10 years in the past at $42 per share. The inventory opened at $52.20 on the primary day, ultimately rallied to an all-time excessive of $640.90 this April, and now trades just under $500.
If you happen to had invested $1,000 in Palo Alto Networks’ IPO, your preliminary funding would have blossomed to just about $11,750 at the moment. Let’s look again on the rise of Palo Alto and see the place it may very well be headed sooner or later.
Picture supply: Getty Pictures.
An American firm with Israeli roots
Palo Alto was based by Nir Zuk, who was born in Israel and is a former member of Unit 8200, the digital intelligence division of the Israel Protection Forces (IDF). On the IDF, Zuk labored beneath Gil Shwed, who would go on to co-found Examine Level Software program in 1993.
Between 1994 and 1999, Zuk labored at Examine Level and helped develop its flagship firewall product. He subsequently partnered with Examine Level’s former VP Asheem Chandna to create a “next-gen” firewall product that may improve conventional firewalls with community gadget filtering companies. That partnership ultimately led to the creation of Palo Alto Networks in 2005.
Increasing right into a cybersecurity large
On the time of its IPO, Palo Alto was usually in comparison with Examine Level Software program as a result of each corporations developed on-site firewall merchandise. However beginning in 2014, Palo Alto made greater than a dozen acquisitions to develop its ecosystem into newer and faster-growing markets.
That enlargement break up Palo Alto’s ecosystem into three distinct platforms: Strata, which homes its on-site firewalls and community safety companies; Cortex, which gives AI-powered risk detection companies; and Prisma, a set of cloud-based safety companies. That enlargement enabled Palo Alto to widen its moat towards cloud-native opponents like CrowdStrike and AI-powered rivals like SentinelOne.
At the moment, Palo Alto refers to its cloud and AI segments as its higher-growth NGS (next-gen safety) companies. It generated 31% of its trailing-12 month income from its NGS companies in its newest quarter, in comparison with 24% a 12 months earlier, and that share will doubtless proceed to climb.
Palo Alto’s mixture of natural and inorganic progress boosted its annual income from $255 million in fiscal 2012 to $4.3 billion in fiscal 2021, which ended final July. Analysts anticipate it to generate $5.5 billion in income in fiscal 2022, which might characterize a 10-year compound annual progress fee (CAGR) of 36% from fiscal 2012. Its adjusted earnings per share (EPS) additionally soared from simply $0.14 in fiscal 2012 to $6.14 in 2021, and analysts’ expectations for $7.45 per share in fiscal 2022 would translate to a 10-year CAGR of 49%.
Palo Alto nonetheless is not worthwhile on a GAAP (usually accepted accounting rules) foundation but, but it surely’s repeatedly stated that it prioritizes its long-term progress over its short-term earnings. Two years in the past, Nir Zuk criticized Examine Level’s slower progress and extra worthwhile enterprise mannequin in a Globes interview, saying that he noticed “no logic in Examine Level dropping market share and nonetheless placing its emphasis on revenue.” However in a CRN interview earlier this 12 months, Zuk’s former colleague Gil Shwed fired again and claimed that Examine Level nonetheless supplied “much better safety” than Palo Alto and its different opponents.
The place is Palo Alto Networks headed?
Palo Alto has been named a market chief in Gartner‘s Magic Quadrant for community firewalls for 10 consecutive years, making it a “finest in breed” participant in a crowded market. It already serves greater than 85,000 prospects throughout over 150 international locations, but it surely may nonetheless have loads of room to develop because the cybersecurity market continues to develop.
Fortune Enterprise Insights expects the worldwide cybersecurity market to proceed rising at a CAGR of 13.4% between 2021 and 2029 as cyberattacks develop into extra frequent and complicated. As one of many prime names on this market, Palo Alto may develop sooner than a lot of its trade friends.
The cybersecurity market is effectively insulated from inflation and different macroeconomic headwinds, since organizations usually will not decrease their digital defenses simply to save lots of just a few {dollars}. That is why analysts nonetheless anticipate Palo Alto’s income to proceed rising at a CAGR of practically 25% between fiscal 2021 and monetary 2024. In addition they anticipate it to steadily slim its GAAP losses because it reins in its stock-based compensation bills and makes fewer acquisitions — and probably even flip worthwhile by fiscal 2024.
Palo Alto’s inventory bought overheated final 12 months, but it surely now seems moderately valued at 56 instances its ahead adjusted earnings and 7 instances this 12 months’s gross sales. By comparability, CrowdStrike and SentinelOne commerce at 13 and 10 instances subsequent 12 months’s gross sales, respectively. Subsequently, I imagine Palo Alto seems like a compelling purchase proper now — and it may have loads of room to run over the following decade.
Leo Solar has positions in CrowdStrike Holdings, Inc. and Palo Alto Networks. The Motley Idiot has positions in and recommends Examine Level Software program Applied sciences, CrowdStrike Holdings, Inc., and Palo Alto Networks. The Motley Idiot recommends Gartner. The Motley Idiot has a disclosure coverage.
