Palo Alto Networks Inc (PANW, Financial) witnessed a slight drop of -1.15% in its daily stock price and a 3-month loss of -7.46%. The company's Earnings Per Share (EPS) stands at 1.26. Given these factors, the question arises: Is the stock modestly overvalued? This article aims to answer this question by providing a detailed valuation analysis of Palo Alto Networks Inc (PANW).
Company Introduction
Palo Alto Networks is a California-based platform-oriented cybersecurity vendor with product offerings that span network security, cloud security, and security operations. With a global customer base exceeding 85,000, including over three-quarters of the Global 2000, Palo Alto Networks stands as a significant player in the cybersecurity landscape. The current stock price is $225.89, with a market cap of $69.70 billion, slightly above the GF Value of $200.95. This article will delve deeper into the company's value, intertwining financial assessment with essential company details.
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 based on past performance and growth, and future business performance estimates. The GF Value Line provides an overview of the stock's ideal fair trading value. If the stock price significantly surpasses 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 will likely be higher.
According to the GuruFocus Value calculation, Palo Alto Networks (PANW, Financial) stock is currently modestly overvalued. Given its relative overvaluation, the long-term return of its stock is likely to be lower than its business growth.
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Financial Strength
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 buying its shares. Palo Alto Networks has a cash-to-debt ratio of 1.05, ranking worse than 64.89% of 2751 companies in the Software industry. Based on this, GuruFocus ranks Palo Alto Networks's financial strength as 7 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies carries less risk, especially those with a consistent profitability track record. Palo Alto Networks has been profitable for 1 year over the past 10 years. In the past 12 months, the company had revenues of $6.90 billion and Earnings Per Share (EPS) of $1.26. Its operating margin of 5.62% is better than 57.77% of 2785 companies in the Software industry. Overall, GuruFocus ranks Palo Alto Networks's profitability as poor.
Growth is a crucial factor in a company's valuation. 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 19.8%, ranking better than 73.48% of 2413 companies in the Software industry. The 3-year average EBITDA growth rate is 131.4%, ranking better than 98.65% of 2006 companies in the Software industry.
ROIC vs WACC
One can evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. In the past 12 months, Palo Alto Networks's ROIC was 1.99, while its WACC was 10.37.
Conclusion
Overall, Palo Alto Networks (PANW, Financial) stock is believed to be modestly overvalued. The company's financial condition is fair, and its profitability is poor. Its growth ranks better than 98.65% of 2006 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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