3417

Palo Alto Networks (NYSE:PANW) Beats Expectations in Strong Q4, Stock Soars


Full Report / August 23, 2021
Add to Watchlist

Cybersecurity provider Palo Alto Networks (NYSE:PANW) reported Q4 FY2021 results beating Wall St's expectations, with revenue up 28.2% year on year to $1.21 billion. Palo Alto Networks made a GAAP loss of $119.3 million, down on its loss of $58.9 million, in the same quarter last year.

Palo Alto Networks (PANW) Q4 FY2021 Highlights:

  • Revenue: $1.21 billion vs analyst estimates of $1.17 billion (3.96% beat)
  • EPS (non-GAAP): $1.60 vs analyst estimates of $1.44 (11.2% beat)
  • Revenue guidance for Q1 2022 is $1.2 billion at the midpoint, above analyst estimates of $1.14 billion
  • Management's revenue guidance for upcoming financial year 2022 is $5.3 billion at the midpoint, predicting 24.5% growth (vs 21.1% in FY2021)
  • Gross Margin (GAAP): 70.5%, up from 69.2% previous quarter

Founded in 2005, Palo Alto Networks makes hardware and software cybersecurity products that protect companies from cyberattacks, breaches and malware threats.

The company started by offering traditional on-premise hardware firewalls and while that is still a big part of their business, it has in the last couple of years been successfully transitioning into offering cloud-based software-as-a-service products.

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. While the majority of Palo Alto’s revenue these days comes from selling software, a significant part of their business is still manufacturing hardware firewalls, and that type of business has higher costs than pure software.

Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks. The migration of businesses to the cloud and employees working remotely in insecure environments are also contributing to increasing demand for modern cybersecurity software.

Palo Alto is a well known brand in the network security space which includes competitors such as Fortinet (NASDAQ:FTNT), Check Point Software (NASDAQ:CHKP), and Cisco (NASDAQ:CSCO).

Sales Growth

As you can see below, Palo Alto Networks's revenue growth has been strong over the last year, growing from quarterly revenue of $950.4 million, to $1.21 billion.

Palo Alto Networks Total Revenue

This quarter, Palo Alto Networks's quarterly revenue was once again up a very solid 28.2% year on year. On top of that, revenue increased $145.4 million quarter on quarter, a very strong improvement on the $57 million increase in Q3 2021, which shows acceleration of growth, and is great to see.

Analysts covering the company are expecting the revenues to grow 18% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Palo Alto Networks's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 70.5% in Q4.

Palo Alto Networks Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.70 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is around the lower average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market so it is important to track.

Key Takeaways from Palo Alto Networks's Q4 Results

Sporting a market capitalisation of $35.7 billion, more than $2.9 billion in cash and with positive free cash flow over the last twelve months, we're confident that Palo Alto Networks has the resources it needs to pursue a high growth business strategy.

We were impressed that Palo Alto Networks guided for revenue growth to accelerate next year. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Zooming out, we think this was a great quarter and we have no doubt shareholders will feel excited about the results. The company is up 5.79% on the results and currently trades at $394.17 per share.

Is Now The Time?

When considering Palo Alto Networks, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Palo Alto Networks is a solid business. Its revenue growth has been solid. And while its gross margins aren't as good as other tech businesses we look at, the good news is its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its very efficient customer acquisition hints at the potential for strong profitability.

Palo Alto Networks's price to sales ratio based on the next twelve months is 7.2, suggesting that the market is expecting more steady growth, relative to the hottest tech stocks. There are definitely things to like about Palo Alto Networks and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $445.5 per share right before these results, implying that they saw upside in buying Palo Alto Networks even in short term.