PANW - Palo Alto Networks

[no_free_lunch]

I came across this one on VIC.  Core thesis is it's a best in class network/security equipment manufacturer.  Economies of scale, it security tail winds, american design and manufacturing, recurring revenue, cross sell opportunities.  Going for roughly 20x fcf with possible sustained 20%+ growth for lengthy period.  Looking at the chart, it appears I am rather late on this one.  Nevertheless it still appears attractive on valuation and the thesis seems reasonable.

 

Palo Alto Networks is a cybersecurity company selling proprietary hardware products with SaaS software solutions to secure organizations’ network, endpoints, and cloud. Superior product performance and breath of offering is driving market share wins in a $20B+, growing market. Our thesis is summarized below:

 

Gaining Share in large, growing market

 

o  Gartner, Forrester, and the SANS institute rank PANW as the best next generation firewall vendor

 

o  PANW is growing 25%+ and has ~15% market in the ~$20B cybersecurity enterprise market

 

o  28% customer growth in most recent quarter

 

Network Effects and Tipping Points, Create a Competitive Moat

 

o  PANW’s 50K customers learn from each other in real time to automatically update their defenses. Very difficult to replicate for new entrants

 

o  Most CTOs and CSOs do not want to own the second best market solution

 

o  PANW is the only company with AWS Networking Competency

..

Strong Recurring Revenue

 

o  PANW does not receive sufficient credit for the recurring nature of sale

 

o  Approximately 63% of sales generated from recurring software service and maintenance revenues, up from 40% in 2014

 

o  Five year old cohort generates 5.1x the initial purchase implying ~100% dollar retention

..

·        Attractive Valuation

 

•      PANW trades at ~5% current FCF yield, despite 28% growth in the most recent quarter

 

https://www.valueinvestorsclub.com/idea/PALO_ALTO_NETWORKS_INC/142255

 

Appreciate any thoughts on the actual products.  Does anyone use these guys and are they the best?

 

No position at this time.

[oddballstocks]

Was getting quotes on firewalls/IPS devices today...

 

We have a Cisco ASA with FirePOWER.  Does firewalling and IPS/threat detection/defense etc.

 

The VAR we buy from sells both Cisco and Palo Alto.  I asked for his advice on the two, they sell a lot more Cisco vs PA.  Said the big differences are in the management.  With PA you manage on the box itself, with Cisco you have to buy a Firepower Management Studio, but it's centralized management.

 

Cisco's Talos is known to be the best in the business.

 

PA has a lot more line cards, and more variety to their platform.  They're directly comparable to the FirePOWER 2100, 4100 and 9300 series.

 

All of these things have terrible licensing fees.  Surf reddit.com/r/networking and read some of the misery from trying to renew with PA.  You buy a device, then buy the licenses on top, and everything renews yearly. 

 

Now to your points.  I think a lot of them miss what the industry is actually like.

 

o  PANW’s 50K customers learn from each other in real time to automatically update their defenses. Very difficult to replicate for new entrants

 

This is true of ANY solution and isn't unique to them.  I worked for a cyber security start-up in the early 2000s, I helped write the sensor and detection software.  We had this model back then too.  You can get this for FREE with Suricata or Snort.  This is 100% marketing BS.

 

Most CTOs and CSOs do not want to own the second best market solution

Not true in the slightest, but interesting spin.  Most CTO's and CSO's want a single vendor solution, this is where Cisco reigns big.  You have Cisco routers, switches, and you need a firewall?  They sell it too. 

 

In the industry there are little pods of knowledge.  You have people who go their entire career doing just Cisco and Juniper stuff.  They won't buy anything else, regardless of the cost.  Then you have people willing to experiment.  They'll do a Fortinet, PA, or something else.  They're looking for more expensive talent.

 

It's easy to buy from a single vendor unless you have a very specialized solution.

 

PANW is the only company with AWS Networking Competency

 

Cisco has a vASA, but do some reading on this, they're virtually pointless in a correctly engineered nextgen cloud network.

 

Check out Fortinet as well, they have a lot of mindshare, similar growth, and a similar FCF yield.

 

PA isn't a bad product, but I'm not sure they're special sauce either.

 

Also worth considering that all of these players are building on top of the same open source tools with customized rulesets.  You can build a box like this for just the cost of the hardware alone.  You're going to be spending six figures for a 10Gbe line rate IPS, or you can buy a 24 core machine with 64GB of ram and an Intel card and do line rate, that might run you $4k new.  So you save $150k? Spend $50k and hire someone to manage it full time, that's now a $100k/year savings. 

 

 

[no_free_lunch]

I appreciate the detailed feedback.  This is officially in the too complicated bucket for me.

[TBW]

I was at a conference where this name was pitched.  What struck me is that shares outstanding went from 11mil in 2010 to 91mil now, over the same period operating income has cumulatively been -690mil...  Not sure there is great alignment here..

 

Not clue about products, space, too far from my understanding (great summary Oddball)

[oddballstocks]

Some good in the weeds discussion:

 

 

[Gregmal]

Keep it simple and just go with HACK or CIBR.

[lucasnascimento]

Anyone knows why Palo Alto's margins are so low relative to other firewall peers (Fortinet, Juniper, Cisco)? Having a hard time here on understanding PANW profitability.

[Gregmal]

Solid report.

 

https://seekingalpha.com/news/3437429-palo-alto-plus-3_8-percent-q2-beats-1b-buyback

 

I get that SBC is how things get done is that world, but why in the heck are the authorizing a share repurchase here? Insanity. Probably the last thing a company of this profile should be doing is buying its own shares.

[oddballstocks]

Ok, an update on these guys.

 

Tried to purchase a PAN firewall, wanted to test out the platform.  I have spent a month trying to make a purchase, no joke.

 

 

Most of my purchases have been rejected because they do some sort of basic check on the business.  The main issue is they only sell to companies where there are no other businesses located at the same address.  If you rent a suite and have gear in a datacenter they won't sell to you.

 

I called and complained to their sales staff (skipped the partner network) directly, was escalated to a manager.  They said their hands are tied.  I said "we have Juniper and Cisco gear and this isn't an issue."  Suddenly they said "oh, if you're buying from them we can let you buy from us."

 

So I'm white listed.... now I put in my orders for the products I want.  It bounces back and forth between the partner and PAN with me getting calls asking for clarification on various SKU's (which have changed since my initial query) and trying to upsell me with other things I've told them I don't need.

 

I had through I'd made a purchase, but now I've been told everything is being requoted.

 

This is incredible, and I'm persistent, I want to test this out. 

 

Their sales is a hot mess.  I can get a Cisco or Juniper quote within a day or two and have gear delivered a few days after that.  You have to really want PAN gear to get a product, or potentially have a sales rep who is working to hard to get an account that they ram things through the backend for you.

 

Not a great experience.

[peterHK]

I own Checkpoint. Balance sheet is crazy strong, growing nicely (but not nearly at the rate of PANW), but you're not paying for much at today's valuation. I also like that they're in bigger enterprises vs. SMB, I feel like it makes their product more sticky/lower churn which is better for business.

 

Overall though the cyber space seems like so much technological progress and commoditification makes it borderline uninvestable. I have a lot of trouble with the terminal value of these businesses because the tech seems to change so fast (e.g Okta now coming in with something different).