Pat McKeough recently answered the question of a Member of his Inner Circle who asked about a stock whose specialty is repelling cyberattacks.
Thanks to a system that lets companies control user access without a blanket ban, Palo Alto Networks has attracted a wide international clientele. The company spends heavily on research, Pat observes, although it also adds expertise through acquisitions. While demand for the company’s products should remain high, he adds, the stock is currently very expensive.
Q: Pat: Can I have your thoughts on Palo Alto Networks as a U.S. tech stock to buy?
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A: PALO ALTO NETWORKS INC. (symbol PANW on New York; www.paloaltonetworks.com) designs and makes firewall security systems to protect computers and mobile devices from online attacks.
Instead of imposing blanket bans for entire networks, Palo Alto’s systems analyze traffic and let network administrators control user access to specific websites and applications. Over 45,000 businesses in more than 150 countries use the company’s products.
Palo Alto first sold shares to the public at $42.00 and began trading on New York on July 19, 2012.
Thanks to growing demand for cyber security products, the company’s revenue jumped 512.4%, from $255.1 million in 2012 to $1.8 billion in 2017 (fiscal year ends July 31).
Earnings before unusual items also soared, from $0.15 a share (or a total of $15.3 million) in 2012 to $2.71 a share (or $253.4 million) in 2017.
For the three months ended October 31, 2017, Palo Alto’s revenue rose 27.0%, to $505.5 million from $398.1 million. Earnings, excluding one-time items, jumped 36.3% to $69.8 million, or $0.74 a share, from $51.2 million, or $0.55.
Growth stocks: Strong balance sheet gives company room for research, acquisitions
Because it operates in a highly competitive and rapidly evolving industry, Palo Alto must continually improve its existing products and develop new ones. Accordingly, it spends a high 20% of its revenue on research.
The company also fuels its growth, and adds to its technical expertise, with acquisitions of related companies. For example, in February 2017, it bought privately held LightCyber for $105 million. The firm offers automated behavioural analytics capabilities, using sophisticated machine learning; it aims to quickly and accurately spot attacks based on the identification of behavioural anomalies inside the network.
The company’s strong balance sheet gives it plenty of room to continue making acquisitions and developing new products. As of October 31, 2017, Palo Alto held cash and investments of $2.3 billion, or $25.02 a share. It holds debt of only $531.0 million.
Recent high-profile cyberattacks, including one at credit-reporting company Equifax, should continue to spur demand for the company’s products. However, the stock is expensive at 47.2 times the $3.38 a share Palo Alto will probably earn in fiscal 2018.
Inner Circle recommendation: Palo Alto Networks Inc. is okay to hold, but only for aggressive investors.
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I think the new approach is crap. Before I could click on headings and get PDF to read. New approach gives me a bunch of adds. If this is going to continue then cancel my subscriptions and refund my payments. I haven’t found one heading I understand. DDevlin
Thanks, David, for your feedback. We value it and will discuss with the team.