Palo Alto Networks (NASDAQ:PANW) is an iconic cybersecurity company that is known as a best-in-class provider of hardware-based firewalls. However, over the past few years, the company has reinvented itself with a series of cloud and software-based security products. This transformation has gone exceptionally well as the company now has 13 leadership recognitions across Network Security, Cloud Security and Threat Detection.

The cybersecurity industry is forecasted to grow at a 13.33% CAGR, between 2022 and 2026 reaching a market value of $299 billion by the end of the period. Palo Alto is poised to ride this growth trend as organizations require security for their multi-cloud services. In this post I'm going to break down the company's financials and valuation, let's dive in.

Strong Financials

Palo Alto Networks reported strong financial results for the first quarter of the fiscal year 2023. Revenue was $1.56 billion, which increased by a rapid 25% year over year and beat analyst expectations by $12.21 million.

Overall revenue was driven by solid Product revenue growth of 12% and total services revenue growth of 30%. By geography, the business saw growth across all regions with the EMEA region being a standout performer, as revenue increased by 32% year over year. This was followed by the JPAC countries (26% revenue growth) and the Americas at 24% revenue growth.

The company's "next generation" security [NGS] platform, which includes the Cortex, Prisma Cloud and Prisma SASE reported solid growth. NGS Annual recurring revenue [ARR] increased by a blistering 67% year over year to a record $2.11 billion. For more on the company's products, you can read my past report on Palo Alto Networks.

Taking a step back, "Billings", which is the amount actually invoiced to customers and the true "top line" for SaaS companies also showed solid growth. Total Billings increased by 27% year over year to $1.75 billion.

Remaining performance obligations (RPO), which is the sum of Deferred Revenue and Backlog, was increased by a rapid 38% year over year to $8.3 billion.

Notable customer wins in the quarter included a 9-figure deal with a U.S Federal government agency for the Cortex product. There was also a 7-figure deal with a large U.S Utility company for its software firewalls and Prisma Cloud technology. The company in question opted to use Prisma cloud as the platform to offer standardized security across 4 public clouds. This is an interesting point to note as a study indicates that 89% of IT decision-makers have a multi-cloud strategy. This is for a few reasons, firstly is security as some companies may prefer to keep some of their applications or data onsite due to regulations or legacy setups. In addition, each major cloud provider AWS, Azure and Google Cloud has various advantages in different areas. Therefore adopting a multi-cloud approach allows organizations to get the best of both worlds while not being tied to a specific vendor.

Historically many cybersecurity companies offered single-point solutions, this was great in the short term as specialist businesses produced the best products. However, as organizations adopt multiple solutions the IT security tech stack can become time-consuming and complex to manage with multiple different updates, patches, and dealing with multiple vendors. Palo Alto Networks aims to simplify this with its single vendor, the Next generation security platform. In the most recent quarter, the company signed an 8-figure multi-product deal with a major European media company, as they consolidated all their legacy security platforms. The company also closed a 7-figure deal with a U.S technology company that adopted all three of its next gen products.

Palo Alto Networks has also continued to generate strong upsells and cross-sells for its products for its largest customers. For example, the number of "Millionaire" customers, which are those with over $1 million in bookings over the past year, has risen substantially. Over 230 more of these "high ticket" customers have been added over the past year.

Profitability and Expenses

Palo Alto Networks reported a Non-GAAP Gross margin of 74.35 which declined by 10% year over year. This was mainly due to supply chain expenses related to component shipping and doesn't look to be a long-term issue. The good news is the company reported an Operating Margin of 20.6% which increased by 260 basis points year over year. This was driven by lower expenses as a portion of revenue across its three main expenses, R&D, Sales and Marketing, and G&A. This is great to see as it shows the business is demonstrating operating leverage while still continuing to grow the top line.

Non-GAAP Net income increased by a rapid 56% year over year to $266 million.

Earnings Per Share were $0.06, which beat analyst expectations by $0.11. The company also reported cash flow from operations of $1.24 billion and reported a record free cash flow of $1.2 billion. This was driven slightly by strong collections in the quarter, but still a great achievement overall.

Palo Alto Networks has a solid balance sheet with $5.9 billion in cash, cash equivalents and short-term investments. However, the company does have $3.68 billion in current debt of the Convertible senior note type, which must be taken into account.

Management has raised its guidance on the strong quarter, full details are in the table below.

Advanced Valuation

In order to value Palo Alto Networks, I have plugged the latest financials into my advanced valuation model which uses the discounted cash flow method of valuation. I have forecasted 25% revenue growth for next year which is aligned with management estimates. However, I am forecasting this revenue growth to accelerate to 27% per year in years 2 to 5, as the economy recovers and the Next Gen Security offering continues to make up a larger portion of total revenue.

To increase the accuracy of the valuation, I have capitalized R&D expenses, which has lifted operating income. In addition, I have forecasted the business to its operating margin to 23% over the next 8 years, as it continues to generate high operating leverage.

Given these factors, I get a fair value of $163 per share, the stock is trading at $171 per share at the time of writing and thus is fairly valued but not exactly cheap. Palo Alto Networks also trades at a Price to Sales ratio = 8 which is fairly valued relative to its 5-year average. Relative to other companies in the cybersecurity industry, Palo Alto Networks is trading at one of the cheapest levels.

Risks

Recession/Longer Sales Cycles

The high inflation and rising interest rate environment have caused many analysts to forecast a recession. Therefore, many companies are likely to reduce or delay spending which could result in longer sales cycles. So far, we are not seeing many signs of this with Palo Alto Networks but it is a general market risk.

Final Thoughts

Palo Alto Networks is a tremendous cybersecurity company that has reinvented their product suite in immense style. The company has continued to produce solid financial results despite tough economic conditions. However, the stock isn't exactly cheap, it is "fairly valued" at the time of writing.

Software stocks are on sale in 2022. Valuations slumped across the board following spiking stock prices in 2021. That previous rally was built on the assumption that demand for software services would continue soaring as it did in earlier phases of the pandemic.

That's not happening. But many software specialists are still posting strong growth in attractive markets like productivity and cybersecurity.

With that in mind, let's look at two growing, profitable tech stocks as potential investments today. Microsoft (MSFT -0.07%) has a huge sales base and pays a growing dividend. Palo Alto Networks (PANW -0.91%) recently achieved profitability and is targeting increasing margins from here.

But which of the two stocks is more attractive today?

Growth and profits

Palo Alto Networks isn't nearly as diverse or well-established as Microsoft. But the flip side of that smaller profile is the possibility of stronger growth. Sales jumped 25% in the most recent quarter, in fact, thanks to robust demand for cybersecurity services.

Microsoft is also enjoying booming demand in its cloud services segment. But declines in areas like gaming and PC software pushed overall growth down to just 16% in the most recent quarter.

The software giant trounces Palo Alto Networks -- and most other peers -- when it comes to profitability. Microsoft's operating profit in its most recent quarter landed at $21.6 billion, or a blazing 43% of sales. Palo Alto Networks' comparable quarterly figure was just $15 million, or 1% of sales.

The big differences

Both stocks are valued at roughly the same price-to-sales ratio of 9 times annual earnings. But you're getting a much different type of investment depending on which software stock you pick.

Microsoft is especially attractive if you are partial to cash. The company had over $100 billion on its books as of late September and generated over $20 billion in operating cash flow in just the most recent quarter.

In contrast, Palo Alto Networks has only seen two quarters of profitability in the last several years. Most of its cash is also going toward the business, while Microsoft can afford to pay a growing dividend while repurchasing shares at an aggressive clip.

The growth story

The main attraction for Palo Alto Networks is its potential to become a much bigger business over time. Its last two quarters of profitability might just be the start of a long streak of expanding margins. The company has a shot at expanding its market share in the cybersecurity industry, too. Enterprises have demonstrated a willingness to prioritize spending on its platform even as they make cuts in other parts of the budget.

More success in that area could allow the company to achieve much higher sales over time than the $7 billion that management is targeting for fiscal 2023. Executives are expecting to expand at a 25% pace this year, while Microsoft is targeting about 12% growth after accounting for currency exchange rate shifts.

A Microsoft investment is much less risky thanks to factors like its massive global sales footprint, cash flow, and dividend payment. However, if you're looking for more targeted exposure to cybersecurity, and the potential for accelerating earnings growth over the next few years, then Palo Alto Networks should be your choice right now.

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Co-written by Loujain al-Hathloul's sister, Lina Alhathloul, the book has incredibly beautiful illustrations as well as a short letter to readers about summoning the courage to dream and create a better world.

"Eyes That Speak to the Stars." Courtesy HarperCollins.

• "Eyes That Speak to the Stars"by Joanna Ho, illustrated by Dung Ho; HarperCollins; $18.99; ages 4-8.

When friends at school create a hurtful drawing of him, a young boy turns to his family for comfort and learns to love his heritage. Inspired by stories of his grandfather's family, the boy recognizes his inner power and strength, and finds comfort in his father's affirming words.

This book is a lovely companion piece to the author's bestselling picture book, "Eyes That Kiss in the Corners." While the previous title centered on female family members, this offering focuses on three generations of male relatives. The idea of "looking up" is a repeated textual and visual motif. Also, the author lives in Palo Alto!

• "The Ogress and the Orphans"by Kelly Barnhill; Algonquin Books; $19.95; ages 10-18.

"The Ogress and the Orphans." Courtesy Algonquin Books.

In a small town that has fallen on hard times, the people put their faith in a dazzling new mayor, who promises that "he alone can help" renew the town. Then the library burns down, and an orphan goes missing. Suspicion, encouraged by the mayor, focuses on a newly arrived ogress who lives on the edge of town. Readers (and the orphans themselves) know that the ogress is kind and helpful, but how can they convince people who refuse to listen?

By an award-winning author, this book is about the importance of generosity and friendship in a community and a cautionary tale of how a town suffers when those qualities disappear.

"Millionaires for the Month." Courtesy Penguin Random House.

• "Millionaires for the Month" by Stacy McAnulty; Penguin Random House; $8.99; ages 8-12.

On a class trip to New York City, two boys find a wallet belonging to a social media billionaire. Before returning it to its owner, they take a $20 bill from the wallet, figuring it would never be missed, but they are mistaken. To teach the kids a lesson, the billionaire offers them a deal: a $20,000 college scholarship or slightly over $5 million cash that they have to spend within 30 days. What would you choose?

The boys rent luxury cars, take their families to Disney World and (of course) spend thousands of dollars on video and in-app games. But the task of spending money quickly becomes a chore and then a huge problem as it changes their relationships with friends, families and each other. The book is fast-paced and funny, but also thought-provoking.

"The Last Mapmaker." Courtesy Candlewick.

• "The Last Mapmaker" by Christina Soontornvat; Candlewick; $17.99; ages 8-12.

This story about identity and integrity is as beautiful and intricate as the maps of old. As an assistant to her country's most celebrated mapmaker, 12-year-old Sai plays the part of a well-bred young lady with a glittering future.

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"Katie the Catsitter: Best Friends for Never." Courtesy Random House Books for Young Readers.

• "Katie the Catsitter: Best Friends for Never" by Colleen AF Venable, illustrated by Stephanie Yue; Random House Books for Young Readers; $12.99; ages 8-12.

This extremely engaging graphic novel series is based on a girl who, in the first book, was cat-sitting for her neighbor while also on a hunt for an arch-villain.

In the new book, someone is impersonating the villain, and all of Katie's friends seem to be moving on from her. Like the first book, this pairs realistic issues (friends growing apart) with suspense over a new crime wave. Oh, and did I mention there are a lot of cats? Laughter guaranteed.

"Key Player." Courtesy Scholastic.

• "Key Player" by Kelly Yang; Scholastic; $17.99; ages 8-12.

The fourth book in the wonderful "Front Desk" series, this follows Mia Tang, the child of immigrants who manage a motel near San Diego. Mia tries to get a scholarship to attend a summer camp for aspiring journalists, but first she has to raise her grade in (of all things) PE class.

Luckily for her, the 1999 World Cup between the U.S. and Chinese women's soccer teams is being played at the Rose Bowl in southern California. Can Mia raise her grade by getting an interview with the players from both the U.S. and the Chinese teams? This series is a wonderful exploration of the complicated issues of identity and immigration, and a great reminder of how important that 1999 World Cup competition was for women's sports.

Analysts have provided the following ratings for Palo Alto Networks (NASDAQ:PANW) within the last quarter:

These 19 analysts have an average price target of $228.86 versus the current price of Palo Alto Networks at $177.59, implying upside.

Below is a summary of how these 19 analysts rated Palo Alto Networks over the past 3 months. The greater the number of bullish ratings, the more positive analysts are on the stock and the greater the number of bearish ratings, the more negative analysts are on the stock

This current average has decreased by 33.1% from the previous average price target of $342.07.

Stay up to date on Palo Alto Networks analyst ratings.

Analysts work in banking and financial systems and typically specialize in reporting for stocks or defined sectors. Analysts may attend company conference calls and meetings, research company financial statements, and communicate with insiders to publish "analyst ratings" for stocks. Analysts typically rate each stock once per quarter.

Some analysts will also offer forecasts for metrics like growth estimates, earnings, and revenue to provide further guidance on stocks. Investors who use analyst ratings should note that this specialized advice comes from humans and may be subject to error.

This article was generated by Benzinga's automated content engine and reviewed by an editor.

Over the past 3 months, 19 analysts have published their opinion on Palo Alto Networks (NASDAQ:PANW) stock. These analysts are typically employed by large Wall Street banks and tasked with understanding a company's business to predict how a stock will trade over the upcoming year.

These 19 analysts have an average price target of $228.86 versus the current price of Palo Alto Networks at $176.49, implying upside.

Below is a summary of how these 19 analysts rated Palo Alto Networks over the past 3 months. The greater the number of bullish ratings, the more positive analysts are on the stock and the greater the number of bearish ratings, the more negative analysts are on the stock

This current average has decreased by 33.1% from the previous average price target of $342.07.

Stay up to date on Palo Alto Networks analyst ratings.

Analysts are specialists within banking and financial systems that typically report for specific stocks or within defined sectors. These people research company financial statements, sit in conference calls and meetings, and speak with relevant insiders to determine what are known as analyst ratings for stocks. Typically, analysts will rate each stock once a quarter.

Some analysts publish their predictions for metrics such as growth estimates, earnings, and revenue to provide additional guidance with their ratings. When using analyst ratings, it is important to keep in mind that stock and sector analysts are also human and are only offering their opinions to investors.

If you want to keep track of which analysts are outperforming others, you can view updated analyst ratings along withanalyst success scores in Benzinga Pro.

This article was generated by Benzinga's automated content engine and reviewed by an editor.