Skip to Content
Stock Analyst Update

A Fair Value Boost for Palo Alto

We're raising our fair value estimate due to an acceleration in product revenue growth.

Mentioned:

No-moat  Palo Alto Networks (PANW) reported durable third-quarter results after pre-announcing revenue and billings on June 1, and we are raising our fair value estimate to $190 per share from $182 previously due to an acceleration in product revenue growth. Product revenue grew 30% year over year for the quarter, with guidance now calling for 20% growth for total fiscal 2018. While this slightly affected our thesis around a shift from Product to Subscription revenue, especially as the increased Product sales will weigh on gross margins for this fiscal year, we believe a larger product base will allow for a better Subscription growth runway over the next decade.

The prevailing news of the quarter was the announcement that former Softbank and Google exec Nikesh Arora is set to replace current CEO and chairman Mark McLaughlin. We note that McLaughlin had not previously given any indication that he had intended to step down or that he was seeking a replacement, so the announcement was a surprise to us. We iterate that Arora was at one point considered the heir apparent to Masayoshi Son of Softbank, serving as president and COO and leading the firm’s investment arm. However, he left Softbank after nearly two years. It was speculated that Son was not ready to hand over the reigns to the CEO role, but Arora was also criticized for his investments in Indian tech firms such as Snapdeal and Ola. While Nikesh has an abundance of tech and leadership experience, he lacks a cyber security background. However, McLaughlin iterated on Palo Alto’s call that the changing dynamics of security and increased importance of SaaS and cloud security makes a tech veteran, with a bird’s eye view of trends, like Arora a natural choice to lead the firm, a statement we largely agree with.

Management raised its full-year revenue guidance to $2.245 billion at the midpoint. The robust growth in Product revenue was unexpected, particularly as we are not seeing the same growth among Palo Alto’s peers.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

William Fitzsimmons does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.