Robust Growth in Store for Palo Alto but Shares Rich

We are raising our fair value estimate to $154 per share for

The subscription and services segment continued to deliver outsize performance, but the firm was aided by a strong quarter and guidance raise for the recently languid products segment. As Palo Alto’s customers have purchased its hardware offerings and signed up for its subscription-based software offerings, the proportion of revenue has shifted to the latter, which is the higher margin business. While we had long been expecting a more tempered 2018 and, by extent, long-term outlook for the products business going forward, particularly as Palo Alto’s software suite of tools has expanded, the results were emblematic of a different story. Management reported nearly 20% product revenue growth for the quarter and guided up to 15% Product growth for the year at the midpoint. We theorize that delayed enterprise reactions to recent cyber attacks that have dominated headlines may be serving as a tailwind for growth across the business. Second, while the refresh cycle and cross-sells aided the top line, management suggested that new customers acquisitions (3,000 for the quarter) were the major driver of growth. As these new hardware users are added to the platform, aiding the Products Segment in the present, we expect cross-sells and upsells for Palo Alto’s software in the near future and raised our assumptions as a result.

Despite these successes, we are concerned about more aggressive competition and significant operating expenses. While we expect robust growth overall for Palo Alto, we would recommend awaiting a pullback in the stock’s price before investing given the current valuation.

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