The stock of Palo Alto Networks Inc (PANW, Financial) has seen a daily loss of -2.15%, and a 3-month gain of 9.74%. With an Earnings Per Share (EPS) of 0.63, we aim to answer the question: Is the stock fairly valued? This valuation analysis will provide insights into the financial health and growth prospects of Palo Alto Networks.
About Palo Alto Networks
Palo Alto Networks is a California-based cybersecurity vendor offering product solutions in network security, cloud security, and security operations. With a global client base of over 85,000 customers, including more than three-fourths of the Global 2000, Palo Alto Networks has established a significant presence in the cybersecurity industry. As of August 17, 2023, the stock price stands at $209.37, with a market cap of $64 billion. The GF Value, our proprietary measure of the stock's intrinsic value, stands at $192.93, indicating that the stock is fairly valued.
Understanding the GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, it is considered overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return is expected to be higher.
At its current price of $209.37 per share and a market cap of $64 billion, Palo Alto Networks stock is estimated to be fairly valued. As a result, the long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength of Palo Alto Networks
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Palo Alto Networks has a cash-to-debt ratio of 1, which ranks worse than 66.69% of companies in the Software industry. Based on this, GuruFocus ranks Palo Alto Networks's financial strength as 6 out of 10, suggesting a fair balance sheet.
Profitability and Growth of Palo Alto Networks
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Palo Alto Networks has been profitable 0 years over the past 10 years. During the past 12 months, the company had revenues of $6.50 billion and Earnings Per Share (EPS) of $0.63. Its operating margin of 2.3% is worse than 50.77% of companies in the Software industry. Overall, GuruFocus ranks Palo Alto Networks's profitability as poor.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Palo Alto Networks is 22.1%, which ranks better than 77.28% of companies in the Software industry. The 3-year average EBITDA growth rate is -17.4%, which ranks worse than 80.63% of companies in the Software industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Palo Alto Networks's return on invested capital is 0.83, and its cost of capital is 9.59.
Conclusion
In summary, the stock of Palo Alto Networks is estimated to be fairly valued. The company's financial condition is fair, and its profitability is poor. Its growth ranks worse than 80.63% of companies in the Software industry. To learn more about Palo Alto Networks stock, you can check out its 30-Year Financials here.
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