Palo Alto Networks Inc (PANW, Financial) recently experienced a daily gain of 1.8%, despite a 3-month loss of -7.71%. With an Earnings Per Share (EPS) of 1.26, the question arises: is the stock modestly overvalued? This article aims to explore this question and provide a comprehensive valuation analysis of Palo Alto Networks (PANW). Keep reading to gain valuable insights into the intrinsic value of the company.
Introduction to Palo Alto Networks
Palo Alto Networks is a platform-based cybersecurity vendor with product offerings covering network security, cloud security, and security operations. The California-based firm has over 85,000 customers globally, including more than three fourths of the Global 2000. With a current stock price of $235.88, the company's market cap stands at $72.80 billion. When compared to the GF Value of $201.41, it seems that the stock may be modestly overvalued.
Understanding the GF Value
The GF Value is an intrinsic value estimate derived from a proprietary method. It is 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 on the summary page 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 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 GuruFocus Value calculation, Palo Alto Networks (PANW, Financial) stock is estimated to be modestly overvalued. As a result, the long-term return of its stock is likely to be lower than its business growth.
Financial Strength of Palo Alto Networks
Assessing the financial strength of a company is crucial before investing in its stock. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage provide valuable insights into a company's financial strength. Palo Alto Networks has a cash-to-debt ratio of 1.05, which is worse than 64.94% of 2721 companies in the Software industry. The overall financial strength of Palo Alto Networks is 7 out of 10, indicating fair financial strength.
Profitability and Growth of Palo Alto Networks
Consistent profitability over the long term usually indicates less risk for investors. Palo Alto Networks has been profitable 1 over the past 10 years. With a revenue of $6.90 billion and Earnings Per Share (EPS) of $1.26 in the past twelve months, the company's operating margin is 5.62%, which ranks better than 57.51% of 2756 companies in the Software industry. However, the overall profitability of Palo Alto Networks is ranked 4 out of 10, indicating poor profitability.
Growth is a critical factor in a company's valuation. Palo Alto Networks's 3-year average revenue growth rate is better than 73.44% of 2398 companies in the Software industry. Its 3-year average EBITDA growth rate is 131.4%, which ranks better than 98.64% of 1987 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 provide insights into its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The 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 came in at 10.52.
Conclusion
Overall, Palo Alto Networks (PANW, Financial) stock is estimated to be modestly overvalued. The company's financial condition is fair, but its profitability is poor. Its growth ranks better than 98.64% of 1987 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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