Bernstein Lists 5 Reason Investors Should Own Palo Alto (PANW)

Bernstein analyst, Pierre Ferragu, highlighted 5 reasons to own Palo Alto Networks (NYSE: PANW) today. As the most successful new entrant in the market, Palo Alto owns only ~7% of the firewall installed base but captures~16% of revenues…and ~43% of incremental revenues. On that basis, the analyst believes they can double earnings and triple free cash flow in three years. No change to Outperform rating or $200 PT.

1) Security spending will continue to grow and will not slow down any time soon.

2) Spending on firewalls in particular will grow fast, with next generation firewalls driving a structural shift of spending towards integrated solutions. Firewall spending has grown from ~45% of infrastructure security to ~65% in the last five years and, if anything, on an accelerating trend.

3) Market shares within firewall will shift towards new entrants…and Palo Alto is proving itself as the most successful emerging player. The firewall market is moving towards those players that can bring the new technology.

4) Palo Alto is a start-up with a free cashflow margin of ~40%...selling cybersecurity is healthy business. Palo Alto typically generates free cashflow equal to four times its net income. This is driven by the cash collection of longer-dated subscription revenues alongside the original product sale.

5) In terms of valuation, the analyst expects Palo Alto to reach the level of maturity of Check Point by 2020 and as such assign a $200 target price. We expect Palo Alto to move more in line with Check Point on different metrics and to trade at 6x sales, which, discounted back to the beginning of 2017, puts our target price at $200. This corresponds to an EV to FY2018 FCF valuation multiple of ~17x.

For an analyst ratings summary and ratings history on Palo Alto Networks click here. For more ratings news on Palo Alto Networks click here.

Shares of Palo Alto Networks closed at $154.71 yesterday.

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