Palo Alto Posts Impressive Results and Remains Confident in Underlying Demand

We are maintaining our $200 fair value estimate for wide-moat Palo Alto Networks PANW after the company reported solid second-quarter results for fiscal 2023. With shares up 8% afterhours, as the firm meaningfully came ahead of FactSet consensus, we still see marginal upside for investors searching for high-quality, cybersecurity exposure. In our view, Palo Alto’s leading platform approach for network security, cloud security and security automation is prompting organizations to consolidate spending toward its products, which increases switching costs. We believe Palo Alto is well-positioned to benefit from customers becoming increasingly embedded in its ecosystem, as its sticky solutions are built for integration across an enterprise’s IT infrastructure.

Second-quarter revenue clocked in at $1.66 billion, up 26% from last year. Palo Alto saw continued strength in next-generation security, with annual recurring revenue, or ARR, from NGS up 63% year over year. Management noted the bleaker macroenvironment this fiscal year, which it believes has had varying levels of impact on spending across customers. While there is caution of a slowdown in customer expenditure over the coming quarters, Palo Alto takes the view that macroeconomic uncertainty drives a greater need for consolidation. With this, we see continued strength in billings and remaining performance obligations, up 26% and 39%, respectively in the quarter. While we think that cybersecurity spending has a degree of resilience, we remain cautious of macroeconomic headwinds pressuring near-term results.