Palo Alto Networks Earnings: High-Flying Palo Alto Closes out the Year in Style

We are raising our fair value estimate to $245 from $225 for wide-moat Palo Alto Networks PANW after the firm closed out fiscal 2023 with a robust set of results coupled with medium-term sales guidance ahead of our prior estimates. Whereas competitors like Fortinet have seen macro pressures affect forward-looking metrics such as billings, Palo Alto’s forward-looking metrics remained strong for the quarter. We believe this strength is a result of the firm’s efficient go-to-market motion and its wide range of products that have helped insulate the firm from macro-induced contractions in demand. Following a sharp increase after hours, we view Palo Alto shares trading in the 3-star range following our fair value increase.

Palo Alto’s sales for the fourth quarter clocked in at $1.953 billion, up 26% year over year and within management’s prior guidance range. Spearheading this strength, Palo Alto’s next-generation security growth remained robust. NGS’ annual recurring revenue expanded 56% year over year to $2.955 billion. We attribute this rapid expansion to Palo Alto’s investments in high-growth cybersecurity areas as the firm diversifies beyond its traditional firewall business.

Forward-looking indicators such as billings and remaining performance obligations also showed strength, growing 18% and 30%, respectively. We believe Palo Alto’s value proposition, as a platform vendor that can help customers save money by consolidating their security spend, continues to draw customer attention despite the macro-related headwinds.

Related to this, we believe the firm’s three-year financial targets, unveiled along with earnings, also bake in vendor consolidation as customers seek to rein in tool sprawl after years of buying disparate cybersecurity solutions. We think vendor consolidation will continue to be a major tailwind for larger, platform vendors that can offer a wide array of security solutions across multiple end-markets.