On August 7, 2023, Palo Alto Networks Inc (PANW, Financial) closed at $214.55, marking a -1.73% change for the day. Despite a 16.54% gain over the past three months, the question remains: is the stock modestly overvalued? With an Earnings Per Share (EPS) of 0.63, we delve into an in-depth analysis of the company's valuation.
About Palo Alto Networks
Palo Alto Networks Inc (PANW, Financial) is a leading cybersecurity vendor, offering product solutions covering network security, cloud security, and security operations. Based in California, the company boasts a global presence with more than 85,000 customers, including over three-fourths of the Global 2000. Despite a market cap of $65.60 billion and sales of $6.50 billion, the company's stock appears to be modestly overvalued when compared to its GF Value of $190.99.
Understanding the GF Value
The GF Value is an exclusive measure of a stock's intrinsic value, calculated considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line represents the fair value at which the stock should ideally be traded. If a stock is significantly above the GF Value Line, it is considered overvalued, indicating a potential poor future return. Conversely, if it is significantly below, its future return is likely to be higher.
Given the current price of $214.55 per share and a market cap of $65.60 billion, Palo Alto Networks (PANW, Financial) appears to be modestly overvalued. This suggests that the long-term return of its stock is likely to be lower than its business growth.
Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss to investors. To avoid this, it's crucial to review a company's financial strength before deciding to purchase shares. Palo Alto Networks' cash-to-debt ratio of 1 ranks worse than 67.29% of companies in the software industry, indicating fair financial strength.
Profitability and Growth
Consistent profitability over the long term offers less risk for investors. Palo Alto Networks, however, ranks poorly in terms of profitability, with an operating margin of 2.3% that ranks worse than 50.77% of companies in the software industry. In terms of growth, the company has a 3-year average annual revenue growth of 22.1%, ranking better than 77.17% of companies in the software industry. However, its 3-year average EBITDA growth rate is -17.4%, ranking worse than 80.59% of companies in the software industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate its profitability. Palo Alto Networks' ROIC is 0.83, while its WACC is 9.76, indicating a potential risk for shareholders.
Conclusion
Overall, Palo Alto Networks' stock appears modestly overvalued. The company's financial condition is fair, but its profitability is poor, and its growth ranks worse than 80.59% of companies in the software industry. For more details about Palo Alto Networks stock, check out its 30-Year Financials here.
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