Rittenhouse Research
AI Infrastructure, Data Centers, Neoclouds, Software & Fintech Research
Palo Alto Networks is a hodge-podge of acquired cloud products stacked on a legacy firewall business, yet trades above 20x forward revenue. Two years from now it will likely be cheaper than today. By comparison, Salesforce has four times the revenue base at two-thirds of Palo Alto's market cap and trades below 20x GAAP earnings. x.com x.comÂ
CrowdStrike and Palo Alto Networks need 50%-plus growth to deliver even a 10% IRR over a realistic horizon, but almost no conceivable case gets them there. They feel as dumb as Zoom and Peloton in 2021. Even if revenue doubles over four to five years, Palo Alto would still trade at 10x revenue and CrowdStrike at 20x, leaving little prospect of a real IRR; Palo Alto is growing in the teens today. x.com x.com x.comÂ
Palo Alto Networks is an expensive stock for the profit growth it will deliver over the next couple of years, despite another strong quarter and a promising annual guide. x.com x.comÂ
Cybersecurity is a clear secondary beneficiary of AI that has been lumped into the software selloff, and Palo Alto Networks is one of the safe bets. It trades at 9x NTM sales for about 23% growth, with a Rule of 40 score above 60 and its CEO buying shares, which is hard to ignore. CrowdStrike and Zscaler are the other safe bets. x.comÂ
Palo Alto Networks at 21x forward sales is too expensive for 17% pro-forma growth, despite BTIG's view that it is worth more than the current price. x.comÂ
Palo Alto Networks' valuation makes little sense: FY2027 guidance of $4.19 EPS at the high end implies only 9.7% growth, yet the stock trades at 85x FY2027 EPS, an 8.7x PEG ratio. By contrast, Credo guides revenue up at least 85%, implying 85% EPS growth at 28x, a 0.33x PEG, though connectivity and cybersecurity aren't directly comparable. x.comÂ
Zscaler likely needs to broaden its product scope, or Palo Alto Networks and CrowdStrike will dominate security through organic growth and acquisitions. Palo Alto grows about 14% organically and mid-20s including acquisitions and, with 4x Zscaler's revenue, commands 10x EV/sales; CrowdStrike, at 2x Zscaler's revenue, gets the same multiple. Scale is being rewarded. x.comÂ
Palo Alto Networks is too expensive at 21x sales and 79x forward earnings for a company expected to grow only about 20% over the next few years. Cybersecurity matters more as AI advances, but even a good company has to be bought at the right price, which is why the stock fell even after a big earnings beat. x.comÂ
Combining estimated NTM revenue growth with trailing GAAP EBITDA margin makes Palo Alto Networks, Datadog, JFrog, Rubrik and Snowflake look overvalued against forward EV/sales. Zoom, Alphabet, Oracle, AppLovin, Microsoft, Fair Isaac, Adobe, Amazon and Teradata remain undervalued on this Rule of 40 comparison; Palantir, Cloudflare and CrowdStrike remain overvalued. x.comÂ
Palo Alto Networks looks set for a near-term move to $400-$410 after its CEO bought $10M of shares. The setup resembles Dell's, and cybersecurity looks attractive here. x.comÂ
Palo Alto Networks looks stretched, with valuation ratios and growth rates resembling its 2021 levels, and the forward multiple is still 22x. @investing_bear makes the same case for CrowdStrike, whose trailing price-to-sales is 43.5 on 26% revenue growth, versus 38.4 at end-2021 on 63% growth. x.comÂ
