Summary
- Palo Alto Networks reported great Q1 results, and is expected to continue growing at an incredible rate.
- While the demand boon for cybersecurity products have no doubt played a role in Palo Alto’s rapid growth, the company’s product innovation and improving operational efficiency has helped tremendously.
- Palo Alto is constantly improving upon its cybersecurity platforms, involving itself in emerging markets such as virtual, cloud, and mobile security.
- While Palo Alto’s high growth strategy appears to be paying off thus far, the company needs to be careful not to let expenses get out of hand.
Cybersecurity companies have performed extremely well over the past few quarters, which comes as no surprise given the ramping cybersecurity threat. Cybersecurity names should rise even further in the near-term given recent events, such as the recent unprecedented federal data breach. With China starting a virtual cyber war against the U.S.(among many other issues in the cyberspace), the services of cybersecurity companies will become more vital than ever.
Palo Alto Networks (NYSE:PANW) has been at the forefront of the cybersecurity revolution over the past few years, paving the way for a new generation of cybersecurity firms. The company has consistently proven its ability to deal with cybersecurity threats/attacks, which has resulted in the company’s long-term upsurge. Palo Alto outperformed once again during itsQ3, where the company reported a revenue of $234.2M and an EPS of $0.23 (beating analysts’ expectations in both scenarios).
Palo Alto expects its financials to improve even more in the near-term, predicting approximately 40%-50% YOY growth in the coming quarters. With the surge in cyberattacks both on the federal and commercial fronts, Palo Alto is set to take on dramatically increasing demand. As one of the leading cybersecurity firms, the company will likely further establish itself on the global stage. With one of the leading threat detection/protection platforms, Palo Alto should be able to offer nearly unparalleled protection for its customers moving forward.
While Palo Alto stock has already experienced significant upward movement, it still has much more room to grow.
Exploding Demand
Demand for cybersecurity has been absolutely staggering in recent quarters. Palo Alto has been one of the main beneficiaries of this booming demand, as its Q3 revenues grew a stunning 55% YOY. Demand for the company’s products, such as its Next Generation Firewall, will likely only accelerate in the coming quarters. In fact, the company expects its Q4 revenues to come in at $252M-$256M, which would represent 41%-44% YOY growth.
While general demand for cybersecurity products has certainly played a major role in Palo Alto’s growth, the company is also doing a lot to foster this type of growth. Not only is the company constantly advancing its cybersecurity platform, but it is also improving upon its operational capabilities, e.g. sales execution. With demand rising in nearly all of its verticals, the company’s future prospects look brighter than ever. The company’s business segments, ranging from cloud security, all the way to mobile security, are experiencing a significant uptrend in terms of demand.
On top of adding 1,500 customers in Q3 alone(increasing its total customer count to 24,000), the lifetime value of the company’s customers is also dramatically increasing. For instance, Palo Alto’s top 25 customers have spent at least $8.2M as of Q3, which represents an approximately 60% increase YOY. In particular, the company’s threat prevention and detection software (e.g. Wild Fire), seem to be playing a large part in its growing demand and customer satisfaction.
Improving Platform
While Palo Alto already has one of the industry’s leading cybersecurity platforms, the company is not planning to slow down its innovation anytime soon. In fact, the company is continuing to ramp up its R&D spending in an attempt to further its lead. As Palo Alto is already a powerhouse in established cybersecurity arenas, the company is putting increasing emphasis on emerging technologies such as virtual and cloud technologies.
With the notable increase in virtual and cloud use, the company’s decision to focus more heavily on these arenas should be great in the mid/long-term. Not only is Palo Alto making technological headway in such arenas, but the company is also partnering with powerhouses in an attempt to further its grip on these markets. The company’s growing partnership with VMware (NYSE:VMW), for instance, will give it a huge edge in the virtualization realm over its competitors.
Palo Alto is also focusing on other emerging arenas such as mobile technologies. By extending its platform to include mobile users, the company is tapping into a huge market. With the exponential rise of mobile users, the company’s mobile security segment is only bound to become larger. Palo Alto has clearly shown a unique ability to adapt to the rapidly changing technological and security landscape, which should continue to give it an edge moving forward. As such, Palo Alto will likely outperform in the near-term future.
Risks
Despite the huge amount of potential upside for Palo Alto, the company needs to be careful not to let its expenses run too high. The company’s spending will likely accelerate in the coming years, which could prove to be problematic. While Palo Alto’s rapid cash burn certainly comes with many risks, the company is making excellent use of its spending. Its strategy of building a massive brand/technology presence and customer base seems to be paying off thus far, although continuing such as strategy will inevitably require additional enormous investments.
Conclusion
Palo Alto is poised to reach new heights if demand continues to skyrocket, which is very likely to happen given the increasingly dangerous cyber landscape. The company will almost certainly experience exploding demand from commercial and governmental entities alike, which is not surprising given how sensitive information and money is at stake. Palo Alto’s positioning in an incredibly promising/lucrative industry should allow the company’s valuation of$14.52M to continue experiencing significant upward momentum.
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