Palo Alto Networks CEO Nikesh Arora told CNBC's Jim Cramer on Monday that companies need integrated, modernized cybersecurity systems in order to protect themselves from "bad actors" who are getting faster at gaining access to sensitive information.
Arora said the problem isn't that companies lack cybersecurity vendors. Rather, their security infrastructure may consist of a complicated assortment of vendors, some of which are outdated.
"Listen, you need to have a two-, three-year road map to try and modernize all of that. Put that in some sort of an AI stack, so you can actually do this in more real time. Because, the bad actors are moving faster," he said. It used to take days to hack into systems, Arora added, but now it can occur within a matter of hours.
"It's important for us to make sure we're ready to deflect the stuff in hours, not in days," Arora continued. "And that requires sort of a modernization. It doesn't necessarily mean you have to spend more money. It just means you have to spend it smartly."
The Securities and Exchange Commission released new guidelines late last month that require companies to report a "material" security breach within four days from when the breach is confirmed. Notable companies like copper miner Freeport-McMoRan, cosmetics maker Estee Lauder and consumer products manufacturer Clorox were recently hit with cybersecurity breaches.
"You really don't want to be exposed, telling the SEC that you have been breached, you haven't fixed it yet," Arora said. "So, one of the things which all of us will have to make sure, is that customers can fix these things much faster."
Palo Alto Networks' stock surged nearly 15% on Monday, likely driven by a Friday after-hours earnings report that showed the company's revenue increased 26% compared with the year-earlier quarter. Revenue came in at $1.95 billion, slightly below $1.96 billion consensus estimates, according to Refinitiv. The company reported adjusted quarterly earnings per share of $1.44, beating the Refinitiv consensus of $1.28 per share.
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Disclaimer The CNBC Investing Club Charitable Trust holds shares of Palo Alto Networks and Estee Lauder.
When Palo Alto expanded access to Foothills Park in December 2020, nature lovers leapt at the chance to visit the pristine preserve, which was formerly limited to the city's residents and their visitors.
According to city staff, about 202,000 visitors went to what is now known as Foothills Nature Preserve in 2022, about 40% more than the historic average. Whether families gathering by Boronda Lake, sightseers snapping photos on Vista Hill, runners huffing along Los Trancos Trail or picnickers congregating at the Oak Grove area, the nature preserve has seen a boost in popularity.
More visitors, however, also means more demand for parking, more speeding vehicles and more pedestrians straying off the official paths and into sensitive areas, according to city staff.
These problems are at the heart of Palo Alto's latest improvement project at Foothills Nature Preserve, an effort that includes new crosswalks and stop signs, increased fencing along trails and reconfigured parking at Boronda Lake and Vista Hill.
The plan has been in the works for more than two years, a product of meetings by a stakeholder group that included, among others, the nonprofits organizations Grassroots Ecology, Friends of Foothills Park, and the Stanford University Haas Center for Public Service. The Parks and Recreation Commission, which discussed the improvements at its meeting Tuesday night, Aug. 22, also had two representatives on the group.
Daren Anderson, assistant director in the Community Services Department, said the recent uptick in visitations has underscored the need for improving safety conditions in the preserve, where drivers, pedestrians and bicyclists are currently forced to share relatively narrow roads.
Staff are also concerned about the number of people walking off trails, a problem that they've tried to solve by installing temporary barriers.
While these stakes and ropes proved somewhat effective, Anderson said the city needs a long-term way to protect the sensitive areas.
"We need real split rail that stays up and fits in aesthetically," Anderson said.
A key component in the package of improvements is a creation of a new pedestrian path that will stretch from the west end of the nature preserve to the east and roughly run along the length of the existing road.
The path would go from the Oak Grove Picnic Area in the west to Lake Boronda in the east, according to a map provided by the city. A separate path, just north Boronda Lake, would allow pedestrians to easily walk from the lake to Vista Hill in the north part of the preserve.
Peter Jensen, landscape architect with the Public Works Department, said the goal is to "create a defined and continuous pathway" through the park,
"Right now, mostly people who are walking through it go down the road and it's just not setting up the best circumstances," Jensen said at the meeting.
Most of the changes center on the area around Boronda Lake, which is the most popular parking area in the park. In addition to installing the split-rail fencing and making two new pathways that will connect the lake to Vista Hill and Oak Grove Picnic Area, the city is preparing to create a parking lot near the northern portion of the lake with 19 stalls.
Because this lot would be set back from the main entry points to the lake, a pathway will be added to make pedestrian access easier.
The new lots will replace most of the parking spots that previously existed along the side of the road but that the city has eliminated in the past two years to Boost safety and protect sensitive areas.
The new configuration would take the total number of parking spots from 355 to 360 spaces, though that's still shy of the roughly 400 spots that existed before 2020.
According to a report from Anderson, most of the parking reductions occurred at the entrance to the preserve and in areas where the road is too narrow to accommodate parking.
Other components of the new Foothills plan aim to slow down cars. The city plans to paint crosswalks and put up stop signs near Boronda Lake. It will also install speed bumps along the main road, in areas where long straightaways make the roads inviting for speeders.
One such area, west of Boronda Lake, will also see new curbs dividing the road from the pedestrian path.
"I think this is going to really aid and address that speeding-vehicle issue," Anderson said of the various traffic-calming measures.
The commission broadly supported the proposal, which will still require City Council approval before the city goes out to bid on a contractor.
Some members proposed other ideas, including stricter time limitations on parking at Vista Hill and other high-traffic areas and narrowing of some road. But the commission generally agreed that the approach proposed by the stakeholder group and adopted by staff will Boost conditions in the nature preserve.
"I look at this as a little bit of an investment to maintain that natural environment with the increased visitation, knowing it's part of a multi-pronged approach," Vice Chair Amanda Brown said. "We have these physical changes, but it is also complemented by the education and enforcement done by our park ranger staff, and we appreciate that."
Commissioner Anne Cribbs, who had previously served on the Foothills stakeholder group, concurred and encouraged the city to also consider improvements to the Interpretive Center at the preserve.
She lauded the efforts by environmental advocates and city officials in advancing the proposed improvements, which the city plans to implement over the next year.
"It's really wonderful to see this come from where it started and the work that has been done by so many people — the stakeholders and the community," Cribbs said.
Chair Jeff Greenfield, a member of the stakeholder group, also supported the plan, though he noted that the removal of roadside parking near Boronda Lake will require some visitors to do a little more walking after they park.
"We'll provide more parking for people overall but it's not quite as convenient as in the past," Greenfield said. "I expect there will be some frustration for visitors who were able to park at the edge of the lake but not anymore."
Teachers and other staff at the Palo Alto Unified School District are getting 7% raises under an agreement reached Tuesday, Palo Alto OnLine reported.
The raises are retroactive to the start of the academic year, the website reported. They are also larger than raises given in previous rounds of bargaining.
In a separate vote Tuesday, district trustees also unanimously approved 5% raises, plus 2% one-time payments, for each of the district’s six top administrators: the superintendent, deputy superintendent, chief business officer, assistant superintendent of equity and student affairs, assistant superintendent of education services, secondary, and assistant superintendent of education services, elementary.
“I think they’re healthy raises that reflect the economic conditions of both the district and the marketplace,” board member Todd Collins said.
As a dividend growth investor, I seek new investment opportunities in income-producing assets. I often add to my existing positions when I find them attractive. I also use market volatility to my advantage by starting new positions to diversify my holdings and increase my dividend income for less capital. Sometimes I look at prospects that can turn into dividend-growth companies in the future. These companies offer strong cash generation and enjoy a strong position in their realm.
The information technology sector is attractive, and Palo Alto Networks (NASDAQ:PANW) in particular. 2022 was harsh for many IT companies as the interest rates increased and valuations decreased as a response. In 2023, we see recovery across the board as the Nasdaq is climbing. I always seek individual opportunities with high-quality companies that I try to acquire for a reasonable and fair price.
I will analyze Palo Alto Networks using my methodology for analyzing dividend growth stocks. I am using the same method to make it easier to compare researched companies. I will examine the company's fundamentals, valuation, growth opportunities, and risks. I will then try to determine if it's a good investment.
Seeking Alpha's company overview shows that:
Palo Alto Networks provides cybersecurity solutions worldwide. The company offers firewall appliances and software, Panorama, a security management solution for the control of firewall appliances and software deployed on a customer's network, as well as their instances in public or private cloud environments, as a virtual or a physical device, and virtual system upgrades, which are available as extensions to the virtual system capacity that ships with physical appliances. It also provides subscription services covering the areas of threat prevention, malware, and persistent threat, URL filtering, laptop and mobile device protection, firewall, and DNS security, Internet of Things security, SaaS security API, and SaaS security inline, as well as threat intelligence, and data loss prevention. In addition, the company offers cloud security, secure access, security operations, threat intelligence, and cyber security consulting, professional services, including architecture design and planning, implementation, configuration, and firewall migration, education services, such as certifications, as well as online and in-classroom training; and support services.
The revenues of Palo Alto Networks have increased by 1380% over the last decade. The company grew its sales more than ten times over by improving its product, selling it to more clients, and gradually increasing prices. The company also engaged in M&A (mergers and acquisitions), which allowed it to grow its sales and offer a more comprehensive cybersecurity platform, thus increasing the value and price for the entire suite. In the future, as seen on Seeking Alpha, the analyst consensus expects Palo Alto Networks to keep growing sales at an annual rate of ~20% in the medium term.
The EPS (earnings per share) of Palo Alto Networks has grown at an even faster pace. The company's EPS increased by 1720%, and as the graph below shows, the growth was steady and consistent. The company is basing its offering on the cloud. Therefore, more clients using more services doesn't increase expenses much, thus allowing the company to grow its EPS even faster despite a higher number of shares. In the future, as seen on Seeking Alpha, the analyst consensus expects Palo Alto Networks to keep growing EPS at an annual rate of ~16% in the medium term.
As the company, which bases its offering on the cloud, kept growing with limited growth in expenses, the margins have improved. The company has posted positive GAAP operating margins. As the company keeps expanding its client base and the services each client buys, its margins will improve. The company is already generating cash and has already generated over $2B in free cash flow over the last twelve months. The fact that the company generates cash and enjoys growing margins is positive for investors.
The number of shares has increased by 42%. Companies tend to return capital to shareholders via buybacks and dividends. When companies are still growing, these two methods are less popular. The increase in the number of shares has diluted existing shareholders significantly. The company doesn't need to issue shares to raise capital. It issues shares to reward its employees. SBC stock-based compensation has increased, and it now stands above $1B. Therefore, the current free cash flow and profitability may be skewed. At some point, the company will have to consider buybacks or limiting share issuance.
The P/E (price to earnings) ratio of Palo Alto, when looking at the EPS estimates for the next fiscal year ending on July 2024, stands at 44. The valuation decreased as the projection for the current year is for strong EPS growth. However, 44 times forward earnings is still an extremely high valuation. The company didn't trade for a forward P/E ratio below 30 in the last twelve months. When considering the higher interest rates environment, shares of Palo Alto Networks are selling for a significant premium as investors see strong growth with high probabilities of success.
The graph below from Fast Graphs emphasizes the unique situation that Palo Alto Networks is in. The company's average P/E ratio since its IPO stands at 107. The current P/E ratio stands at 44. While it seems attractive, we need to look at the growth rate. The CAGR (compound annual growth rate) in the past was 40%, compared to the current 17%. Therefore, a lower valuation makes sense. Over time, the growth rate is unlikely to match the past growth rate. I believe that the current valuation still includes a significant premium.
Palo Alto Networks' shift towards a cybersecurity platform is a crucial growth opportunity. A platform allows clients to "plug and play" different security products using a single platform. They do not need to buy additional services, hardware, and products to protect the organization. Palo Alto Network can offer various services on its platform to cater to every need and enjoy a higher stickiness.
The combination of a platform capable of giving a variety of high-quality services, as today Palo Alto Networks leads in 10 Gartner Magic Quadrants and Forrester Waves, together with the trend of cloud migration, supports growth. Cloud migration means more businesses will need cyber protection, and corporations will need more services with higher usage. Therefore, we see an increase in the number of large accounts and these accounts buying more services.
Russia and China are a significant cyber threat to many governments and corporations. These countries are trying to hinder Western interests. Russia is doing this to hurt Western countries over the sanctions imposed after it invaded Ukraine. China is attempting to gain knowledge and information mostly. These risks increase the value of a solid cybersecurity platform Palo Alto Networks offers.
The first risk is competition concerns. Palo Alto's investment landscape is dealing with intense competition. The cybersecurity sector is full of startups aiming to disrupt the market, established peers like Check Point (CHKP) pose stiff competition, and even tech giants like Microsoft (MSFT) are entering the realm of software cybersecurity. This crowded and evolving competitive landscape could potentially erode Palo Alto's market share and force the company to invest heavily in innovation and marketing to maintain its current platform's edge.
In addition, the lack of margin of safety is even riskier. With a P/E ratio of 44, Palo Alto's stock appears to be priced for perfection. Such a high valuation leaves little room for error and raises concerns about an overvaluation bubble that could burst if the company fails to meet optimistic growth expectations. Investors should be cautious as this elevated valuation leaves little buffer for challenges or market downturns.
Investors should also consider reputation vulnerability. Palo Alto's reputation is a valuable asset, and any breach or penetration of its clients' systems could severely damage its standing in the cybersecurity industry. A significant security incident could erode customer trust, leading to client loss and investments in remediation efforts. The time required to restore the company's reputation might hinder growth and limit its ability to capitalize on opportunities during recovery.
To conclude, Palo Alto Networks is a fantastic company that grows across the board. Its sales and EPS are growing and generating cash. It leverages its business model to increase free cash flow as the margins improve. Investors in the company will capitalize on significant growth opportunities, including the superb platform it offers and the cloud migration trend.
While there are risks to Palo Alto, mainly regarding the competition and a dent in its reputation, these are manageable risks. However, the company valuation is a problem for me with an investment in the company. At 44 times earnings, that company leaves investors no margin of safety. If growth slows down, the valuation will decrease, which is a significant risk. Therefore, I believe the shares are a HOLD, and I'd consider buying them when the forward P/E is around 30 and the growth rate is still above 12%.
Jason Green is a breaking news reporter for the Bay Area News Group. He works week nights and spends most of his time covering crime and public safety; reviews videogames now and then, too. He is a graduate of UC Santa Barbara, with a BA in Communication; and the University of Southern California with a MA in Print Journalism.
“Lesson learnt :)”
After spooking Wall Street for weeks with its plans to report earnings after Friday’s closing bell, Palo Alto Networks Inc.’s mysterious move turned out to be much ado about nothing.
Some analysts were fearing trouble at Palo Alto Networks PANW, +0.47%, especially after fellow cybersecurity company Fortinet Inc. FTNT, +1.49% delivered a downbeat report earlier in the cycle and Palo Alto teased that its own call would last about two hours. Wedbush analyst Daniel Ives didn’t mince words in his preview note, writing that the decision to post results late Friday was “one of the biggest PR disasters and black eyes we have seen in decades of covering tech.”
Going back to 2018, only one member of the S&P 500 index SPX posted earnings on a Friday, according to Dow Jones Market Data. That was Nike Inc. NKE, -2.67% in December 2020, and while the report from Nike brought good news, Wall Street was still fearful headed into Palo Alto Networks’ report given the unconventional scheduling.
But results turned out to be fine, as Palo Alto beat earnings expectations and largely topped estimates with its guidance.
Palo Alto Networks shares sunk about 18% between when the company announced its earnings date, toward the start of the month, and Friday’s close, before the release came out. That selloff came during a period when tech stocks in general were under pressure, though the Nasdaq 100 index NDX was down only about 6% in the period.
Shares of Palo Alto Networks rallied sharply after the latest results, however, up more than 11% in Friday’s extended session.
Palo Alto Networks Chief Executive Nikesh Arora suggested on the earnings call that he thought the company had been clear enough in its rationale for the Friday afternoon timing.
“We apologize to people who are inconvenienced,” he said at the top of his prepared remarks, according to a transcript provided by AlphaSense/Sentieo. “But as we had mentioned in our press release, we wanted to supply ample time to analysts to have one-on-one calls with us over the weekend, and we have a sales conference that kicks off on Sunday. We want to make sure all of our information was disclosed out there.”
He added some more lighthearted remarks, including to say that the company “enjoyed the attention” and that analyst reports that speculated on the timing “made for some very interesting reading.” Arora said that analysts might tell future mentees about the unusual Friday event, which came out of the company’s “sort of misdirected sense of trying to get you guys to go do this over the weekend for us.”
Arora shared on X, the service formerly known as Twitter, that 5,500 people had dialed into the company’s call about two hours into it, whereas average attendance over the past five years was about 1,000.
But would the company do it all again? Presumably not, he suggested.
Wallace Witkowski contributed reporting.
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