A Fair Value Boost for Palo Alto

No-moat

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.

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