Palo Alto Networks Inc (PANW, Financial) experienced a daily loss of -3.14% and a 3-month gain of 2.49%, with an Earnings Per Share (EPS) of 1.26. The question we aim to answer is: Is the stock modestly overvalued? Our valuation analysis below provides the answer. We invite you to read on and gain valuable insights into Palo Alto Networks' intrinsic value.
Company Introduction
Palo Alto Networks is a platform-based cybersecurity vendor with product offerings covering network security, cloud security, and security operations. The California-based firm boasts over 85,000 customers across the globe, including more than three-fourths of the Global 2000. As of November 03, 2023, Palo Alto Networks (PANW, Financial) was trading at $242.5 per share, with a market cap of $75.40 billion. The GuruFocus Fair Value (GF Value) for the stock stood at $203.77, indicating it was modestly overvalued.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
Our analysis suggests that Palo Alto Networks (PANW, Financial) appears to be modestly overvalued. The GF Value estimates the stock's fair value based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns.
Given that Palo Alto Networks is relatively overvalued, 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 poor financial strength has a higher risk of permanent loss of capital. Thus, it is essential to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Palo Alto Networks has a cash-to-debt ratio of 1.05, which is worse than 64.98% of 2741 companies in the Software industry. GuruFocus ranks the overall financial strength of Palo Alto Networks at 7 out of 10, which indicates that the financial strength of Palo Alto Networks is fair.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Palo Alto Networks has been profitable 1 over the past 10 years. Over the past twelve months, the company had a revenue of $6.90 billion and Earnings Per Share (EPS) of $1.26. Its operating margin is 5.62%, which ranks better than 57.59% of 2768 companies in the Software industry. Overall, the profitability of Palo Alto Networks is ranked 4 out of 10, which indicates poor profitability.
Growth is probably one of the most important factors 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. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Palo Alto Networks's 3-year average revenue growth rate is better than 73.04% of 2396 companies in the Software industry. Palo Alto Networks's 3-year average EBITDA growth rate is 131.4%, which ranks better than 98.7% of 1993 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 1.99, and its cost of capital is 10.56.
Conclusion
In conclusion, the stock of Palo Alto Networks appears to be modestly overvalued. The company's financial condition is fair, and its profitability is poor. Its growth ranks better than 98.7% of 1993 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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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
