Investment Thesis for Palo Alto Networks (PANW)

July 19, 2024

Profile:

Palo Alto Networks is a major cybersecurity company that provides comprehensive security platforms to protect organizations from various digital threats. Their offerings include next-gen firewalls, cloud security solutions, endpoint protection, and AI-powered threat detection and prevention tools. The company has recently shifted its strategy towards "platformization," aiming to integrate its diverse range of security products into a unified, cohesive platform. This approach allows customers to consolidate their security tools, reducing complexity and improving overall security. Under CEO Nikesh Arora's leadership, the company has been focusing on innovation, including the integration of AI and machine learning technologies to enhance its cybersecurity capabilities.

Palo Alto Networks (PANW) is a compelling investment opportunity, driven by strong financial performance, and favorable market dynamics. Recent events, including the major IT outage that shut down flights, small businesses, and broadcasters all across the globe due to an error from CrowdStrike, have created a golden opportunity for Palo Alto to gain market share.

Market Overview:

The cybersecurity market is currently experiencing significant interest from investors due to increasing digital threats, cloud adoption, and regulatory requirements. Key market dynamics include:

• The global IT outage caused by CrowdStrike has led to a 12% drop in its stock price, creating an opportunity for Palo Alto to attract customers seeking more reliable solutions.
• While CrowdStrike's stock dropped, Palo Alto saw a positive movement with the stock closing up 3.4%. The immediate boost indicates positive short-term financial implications for the company.

Strategic Initiatives:

Platformization Strategy: PANW's shift to a comprehensive platform approach has shown promising results, with 79% of Global 2000 clients utilizing more than one platform and 57% implementing all three. This is where Palo Alto has the competitive edge compared to its major competitor CrowdStrike.

AI-Driven Innovation: PANW's focus on AI-powered security solutions positions it ahead of competitors in addressing advanced threats.

Investment Strategy:

My investment strategy for PANW focuses on capitalizing on short to medium-term price appreciation.

• Profit Objective: Target a 10-15% price increase in the next month based on technical analysis.
• Stop-Loss: Implement a stop-loss order at 8% below the purchase price to limit potential losses.
• Retest: Make sure to re-evaluate possibilities for further growth and appreciation after the first target is met.

Rationale and Justification:

Financial Performance:

Palo Alto reported a 15% year-over-year increase in revenue for fiscal Q3 2024, reaching $2.0 billion. This growth is supported by strong customer adoption of its platform-based approach.

The company's non-GAAP operating margin expanded by 200 basis points to 26%, demonstrating efficient scaling and improved profitability.

PANW's adjusted free cash flow margin is projected to be between 38.5% and 39.0% for fiscal year 2024, providing financial flexibility for investments and acquisitions.

Technical Data:

Symmetrical Continuation Triangle: This bullish pattern indicates a potential 10-15% price increase for Palo Alto in the next month.

Head and Shoulders Bottom: This pattern confirms a bullish reversal, suggesting Palo Alto has completed a bottoming process and is poised for an upward trend.

Palo Alto Networks (PANW) on the Daily Chart

Risks:

• Higher U.S. Import Tariffs: Potential tariff increases under a Trump administration could raise costs for hardware components, affecting margins and competitiveness. In contrast, CrowdStrike's cloud-native model is free of Trump’s proposed tariffs.
• Slowing Growth Rate: The 15% revenue growth in Q3 2024 is a significant decline compared to previous quarters. This is explained by Palo Alto CEO Nikesh Arora: "We are starting to see some customer fatigue towards cybersecurity spending."

Conclusion:

Palo Alto Networks is well-positioned to capitalize on recent market dynamics and technical indicators suggesting short-term price appreciation. I fully believe if we can see a 1% - 2% gain in tomorrow's session this will signal trader strength and a continued uptrend. My trading guidelines are meant as a guideline; pay the price that coincides with your desired exit strategy and risk tolerance.