Episode 58 | Why Palo Alto Networks’ Acquisition Matters for Investors in the Cybersecurity Industry

In Episode 58 of “Market News with Rodney Lake,” Professor Lake, director of the GW Investment Institute, analyzes Palo Alto Networks, a leading cybersecurity company that is not in the GWII portfolio but holds strategic importance in today’s market. Lake highlights Palo Alto’s strong client base, consistent high gross margins, improving profitability, and robust free cash flow, while noting a gradual slowdown in revenue growth and low net margins. He also examines the company’s $25 billion cash-and-stock acquisition of CyberArk. This major capital allocation move underscores consolidation in the cybersecurity industry and expands Palo Alto’s capabilities in identity security. This deal, alongside Palo Alto’s stable leadership and strategic role in AI-driven cybersecurity, strengthens its competitive advantage and long-term potential for investors.

Chapters

• 0:00 Introduction
• 2:28 Business
• 10:44 Management
• 15:01 Price/Valuation
• 17:17 Balance Sheet
• 20:17 Conclusion

Transcript

Thank you for joining “Market News with Rodney Lake.” This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started.
Welcome back to “Market News with Rodney Lake.” I'm your host, Rodney Lake. Welcome from the George Washington University School of Business. Duquès Hall. Duquès family studio right here in the heart of Foggy Bottom. We are,
you know, in August year 2025. And classes are just about to get started. So students are starting to filter their way on campus.
This is a GW Investment Institute podcast. And so what is the GW investment? You should look at our website. Just Google GW Investment Institute and you'll find it. But our students manage a little bit more than $10 million of student managed funds across four portfolios, mostly fundamental security analysis research, but also some quantitative and also a little bit of real estate.
Sprinkled in. And then we have a venture class, but not a fund. All right. What are we going to talk about today? Today is an episode about a company. This company we don't currently own, but it's a very important company. We're following it closely. We own two other companies in this category. Today's company is Palo Alto Networks.
The ticker is PANW. Why are we covering this company today? Well, we try to cover companies in the portfolio. We don't own this currently. But the reason I wanted to put this in here is because they've had some news recently. They're doing a big acquisition and we'll talk about that. But we own Fortinet and we own CrowdStrike.
And so these are big names. And if you think about if we had Dan Ives on the episode and Dan Ives was talking about his 30 AI plays, and CrowdStrike is in there, Fortinet is not. But Palo Alto Networks is in there. And cyber is certainly a way to play the AI. And one of the names that he removed and a company that we have reviewed is Adobe.
And so something that might be hurt by AI like Adobe, another company like Palo Alto or CrowdStrike might be actually helped and enabled by AI. And we'll talk some about that as, as we get through the episode here. But again, the company is Palo Alto Networks, and we're going to use the GW Investment Institute framework, business, management, price/valuation, and balance sheet to review that.
And we'll go over each component. And then at the end we'll bring it together and I'll let you know along the way. Also what you know, I'm thinking about it. And you know, what am I concerned about or what I what do I think is an opportunity things to watch out for. So let's dive into the business. And so just number one, you know, what is CrowdStrike.
So you know, it is a cybersecurity company. And so very broadly it provides network security, firewalls, identity, which we'll talk about control applications, scan content to stop threats, prevent data leakage, integrated applications. So they serve some of the biggest clients in the world. So just a few basic stats, if you think about them, they are, you know, serving, you know, something like, you know, 70,000 organizations in 85 of the top 100, Fortune 100 companies.
So, you know, they certainly have really big clients. All right. So now we have some, you know, idea about the business, and you've probably heard them. And if you have a work account, they might provide your virtual private network as an example. And, you know, so you may have some interaction with them and maybe you don't, but, you know, they provide business grade VPNs.
You might use a home VPN, and they provide the same type of service, to businesses and other types of cybersecurity. Now, one of the things that's interesting about cybersecurity is that it's no longer, you know, should we have this or should we have that? It's it's really about what do we want to deploy. And you know, what companies are we going to bring in to make sure that we have a rounded out really good cybersecurity program.
And, you know, what is going to protect their data? What's going to protect the client's data and the clients accounts, depending on what you're doing. And so it's it's super important. And, and certainly almost every company, it's hard to really think of a company that doesn't have to think about this. Maybe if you have a vegetable stand along the road and you take only cash, but even if you take QR payments, like, you really got to think about, well, maybe I need a VPN, for that, you know, when people are scanning to make sure that, you know, there's nobody intercepting their, their pay, payment processing there.
And so really, you know, cybersecurity is really built in now. And I think it's incumbent as a business person, as an analyst, investor to be thinking about, okay, well, what, what are the opportunities out there? And I absolutely think, that Palo Alto is something that you should be focused on, as a company. All right. So let's get some stats.
So let's start talking about market cap. So what's the market cap 123 billion. So this is a large company but again not as large as Nvidia, Microsoft, not at that scale. Or Apple, for example. And so but $123 billion market cap is a very large company. And let's get into the financials a little bit next up here.
So and again, we're, we're in August of 2025. Just a date for the episode. So let's talk about again market cap 123 billion. Revenue. So let's dive in so what's the revenue for this company. If you look at the trailing 12 months, they just reported 7/31 $9.2 billion in revenue, and that is it almost a 15% growth, over the last year.
And so that's pretty significant, year over year growth, from 20, for for the last 12 months, rather, from 2024 to 2025. So very significant growth, 15% at that level is very good. Next up here let's tackle and maybe back up for a second. Let's talk. We often talk about well, we care about what's happening with the company today.
And tomorrow. And we're really as analysts. Where is this company going to be in the next year, two years, five years? And for us, as long term investors, we try to think about ten. But it's hard. But really what's going to be happening in the next 3 to 5 years. And how do we position ourselves for that? So okay.
Well some instruction can come from what has happened in the past. Now you can't it doesn't always, you know, lead one to the next. But it's instructive. You know, how's management doing? How have they performed, maybe in difficult periods. And if you look at the revenue from 22, 23, 24, you're talking about 5.5, 6.8, and then 8, from 22 to 23 and 24 respectively.
And so very significant growth rates, you had a 30%, a 25% to 16%, and then now a 15%. Obviously, that second derivative, the growth rate, is slowing down, right? The numbers are going up. The first level, the second derivative is slowing down a little bit, again, going from 29 to 25 to 16.5 to 15. Okay.
That's obviously well it's the growth is slowing down. But where is it going? Well it's slowing down a little bit further. So the projected full year for 26 their fiscal year 7/31 next year is 14%. So that puts them at 10.5 and 11.9 out in 27. So that's 13.5. So that growth rate continues at least the projections the consensus numbers.
It's going to slow down. Not a huge concern given at this scale. But certainly something that we need to watch out for when we're going to rate the business. You know, that growth rate is something that we're going to factor in. But okay, let's start looking at the quality, the business. So let's look at the margins. When you're thinking about how do I evaluate the quality of this business.
You're going to look at the gross margins. You're going to look at the net margins. You're going to look at the moat around the business. But let's first tackle the pricing power as an example. Gross profit margins currently, again 7/31 end of their fiscal year that they just reported, you have 73% gross margins. And how have they been over time?
Those are excellent, right? Those are top tier gross margins. Well they've been 68, 72, 77, 73, 73. So very consistently high right. They were 68. And they actually bumped them up. They got to 77 back down to 73. And that's from 22 to currently at 25. So very good trend there. Actually has bumped up recently and has come back down from 77 is the high of 2024 to 73 now.
So that's pretty good for the full year. 2025 is the 7/31 number for them. But let's look at the the net margin. So this is where people, you know, get concerned when we get to the valuation for Palo Alto. So if you look at the net margins here you're talking in 20 the current. Let's start there. The reported number from 7/31 was 12.1%.
And so when you think, well you're at 70, how do you get to 12? Well, that's a long way. That's a big difference. And if you dial it back though and you think, okay, well where, where were they? Net margins were negative in 22, -4.2, 6.6 positive in 23, 11.7 in 24, 12.1. And so you can see obviously early days this is a newer company.
They're investing heavily in the business not as you know not achieving earnings per share. But now they are. And that that net profit margin is increasing. And so again where's this going in the future. Very importantly as an analyst business person investor that's what we're most concerned about next year 26 full year, 7/30 7/31 25 and 26 and 7/31/27 so that's excellent news for us.
All right. The net margin has come from -4.2 projected to get out to 26, in the next two years. And so that's good news. All right. Well, let's look at the free cash flow as well. So if you look at the, free cash flow, you're talking 3.4 billion, almost 3.5 billion for 2025. So that's excellent. And, you know, cash from operations 3.7.
So they're investing but not a ton of money, you know. So CapEx 246 million. So for a company this size, you know, that would be a concern. You know, next year projected to be 156 million and then 229 in 27. So when you're thinking about management, you know, what are the investments that we're doing? And we're going to get to that when we get the management here because they just made a big investment.
It's not closed yet, but we'll talk about that. All right. So overall right now going to give this business a fairly good grade right. So let's think about you know all things considered you know where is the net margin now. Where is it likely to go. The slowdown in the growth rate I think we can give this an eight for the business.
So let's stick with that for now. You can always adjust it up or down a little bit. But I think it's an excellent business. They're growing but not as fast as they could. So it's maybe not eight and a half or nine. The net margins are improving. They're not investing, at least for me, as much as they could.
But we'll get to that. They've done a big acquisition here and we'll talk about that. So they certainly have invested a lot in that. So let's, let's get back to it. So business we'll rate it as an eight. All right. Now let's move on, to the management. So, who's the management of this company? So you've just had, the founder stepped down.
But the management has been in place for quite some time. The current management. So, Nikesh Arora, CEO, since June 2018, and he's been steering this platform, the transition and the M&A strategy. The founder and CTO, Nir Zuk retired recently. And then, Lee Klarich, longtime chief product officer has stepped up now is, chief technology officer and joined the board.
And so, you know, so there's some good continuity there. Obviously, one of the things that we do really like are the founders, you know, the founders being involved in the company, you have the CEO level CTO. That's great. But Nikesh has been there for a while now, since 2018 has been leading the company and it's very positive.
So I think that is something, that we should be really, you know, excited about, or at least happy about. So I think the biggest thing to think about right now on the management side, obviously, is there's some stability there, which is good. And then what do they have? What have they been doing on the capital allocation side?
So if you look at the capital allocation side, the big news that we have to talk about is the CyberArk acquisition, $25 billion acquisition, cash and stock. They're going to, you know, it's going to be financed principally, with stock and some cash. So no debt on that acquisition, at least that I found unless I misread what's out there.
So that's great. That obviously impacts on the balance sheet side, but there can be some dilution there. But one of the things that that's, on the CyberArk is this identity and so security and that's really important. So if you think about why is that important? Well, at least me as an analyst. And this is why I think you should be paying attention to this acquisition.
Cyber Ark is expert in this identity verification, identity management, identity for cyber security. Why is that important? Well, if you're adding all of these AI agents, making sure that those are secure are going to be very important. So if you're deploying agents instead of workers, right. If so, if you replace the workers ID with a with an agent ID, you're going to want to make sure that you have that that security sorted out properly.
And CyberArk has been doing that and is a leader in that. And so if you combine that with the platform that Palo Alto has built already in the cybersecurity space and with their customers freely, this is a this is an excellent combination, at least in my view. And, you know, are they paying too much for it?
Well, on the valuation side, if they're paying a lot in stock for it, maybe not. Maybe they're exchanging, possibly overpriced in the short term stock of CyberArk for, overpriced stock. If you're being a little bit cynical, about the valuation from Palo Alto stock. And so but what we'll get to, to the valuation in a second, I would say, and we'll stick with this for the capital allocation that this is that great capital allocation.
Now, time will tell. They have to, number one, close this deal. But they also have to execute, make sure they get these synergies. Make sure they can integrate this platform make sure this works. But as far as going out and swinging big for me I like this. I like what the management is doing. They're absolutely forward thinking about what is next in the AI world and what will, you know, what will need to be addressed.
Identity is a big part of that. If you take their platform and you add that onto their platform and you get the distribution that they have, again, 70,000 clients and organizations and top tier clients in the Fortune 100, that's fantastic. That's a way to distribute. So you have to have distribution, obviously, to make this work.
And they have that already. And again, to me, it's a tip of the cap for management. So all right, what do we give then management. So let's let's get to the scoring on the management side. So I would give them an 8.5. You know obviously there's a lot there's quite a lot of room. Between now, and, you know, execution time.
So maybe let's dial it back and actually call that an eight. So we'll say it's at eight for now. Management I think is excellent. I think they're going the right way. There's good continuity there. 2018 so let's let's move on from management. So next up is obviously the price versus the valuation. And so what what does the valuation look like for Palo Alto Networks.
Well let's look at the forward PE. You know they have positive earnings. So we can use this so 50 times. Right. Well that you know that's not a great valuation. It's really 48 and change. But that's that is not cheap right. And that's not expensive relative to where they've traded in the past. But certainly it's not cheap.
But if you look at them versus their competitors, it's also not outrageously expensive either. So if you look at them versus Fortinet or others, you know, that's not going to put them. You know, Fortinet is cheaper than them. But CrowdStrike could be more expensive than them as an example. And so the valuation currently is high. And so we definitely have to give them a ding on that.
But it's not outrageously high relative to where the market is trading and relative to their certainly over their peers. But if you're if you have a high quality business and I would call them one of the leaders in this business along with CrowdStrike and Fortinet. And you can probably, you know, the market has assigned them a higher valuation.
This, I do think this is a premium company. It does deserve a relative higher valuation, in my view. Now, what's the right level? That's something else that we have to figure out. But 50 times is expensive. Now maybe part of the good story is there that they use stock a lot of stock to do the CyberArk acquisition.
So that could be a good thing that they use some of that valuation to help them grow with with that stock and use it as a currency. And possibly maybe they purchase another overvalued stock, which maybe nets out that benefit. But let's say that that, that is okay for now. So on the valuation side, you know, trading at that on a relative basis, we're going to ding them.
And so they're even though okay, it's a premium company, we have to pay for it. But we're going to take some out of this in the score. And we're going to we're going to be a little bit harsh today and give them a five, for that. Now again, you pick up some benefit there and maybe we could let's make it a 5.5.
To be a little bit more generous here on the valuation side. So that's a 5.5 and maybe you could even call it a six. So let's give it a six. All right. So moving on from the valuation. Now let's get to the balance sheet. So where is the balance sheet for Fortinet. Sorry not Fortinet Palo Alto Networks we've already covered for tonight.
All right. But cash and cash equivalents 7/31 $8.5 billion. They're going to use some of that money for this acquisition. And 33, 338 million in debt. So this is a rock solid balance sheet. This is going to definitely help you sleep well at night. Right now. And even with if they do mostly stock for the acquisition, you're still going to have a clean balance sheet.
All right. Now let's look at this over time. So where have they gone or have where they where have they been. Excuse me. Where are they going. Well, in 2022 they were at 4.6 billion in cash and cash equivalents and 3.9 billion. So they had net debt or they were sorry they had net cash, but certainly a very, small margin compared to where they are now.
And so if you look at 23, 5.4 and 2.2 versus cash and debt, so you know, obviously moving in the right direction there and then 24 6.7 versus 1.4 further in the right direction. And now if you look at 25, you know, almost eight and a half in 338. So also you know, we talked about management and we gave them a reasonably good score.
This is also a good score for management here if you would include it. Obviously these are all integrated and thinking about how the management is managing the risk on the balance sheet. Well, they're doing an excellent job here and you're going to be sleeping at night. Well because they have you know, you know, net cash of, you know, over $8 billion right now.
And again that's pre acquisition. So they'll spend some of that. But again a lot of that's going to be stock. They're still going to end up with a clean balance sheet. And as we mentioned they're generating three almost 3.5 billion in net cash free cash flow. So that's fantastic. And projected to generate 4 billion 4.5 billion at 26 and 27 respectively.
So those are good things. And that's something that you should be thinking about, you know, is the free cash flow generation and the interest coverage ratio not really relevant here because they have so much net cash. It's going to be very high. You know, over ten is our number. But, we're we're well over that, for Palo Alto.
If you do it, it's like 400 or something like that. So it's it's very high. And so not an issue for us for that. And again, that's going to help you sleep at night. And that's that's all good. So we're not worried about that. We're not worried about, you know, what's happening with the net cash position currently now again Post-acquisition it's still going to be okay.
But it is something that we have to watch and something that, as an analyst that you want to keep paying attention to 400, over 400 again, on the interest coverage ratio. That's earnings before interest and taxes over interest expense for the calculation. But again, helping you sleep really well at night on the balance sheet. So what are we going to give the balance sheet?
So let's give the balance sheet a nine. Maybe we don't give anything a ten. This has got to be close to a ten. But we give the balance sheet a nine. You could probably even call that a nine. And a half if you want. Let's give it a, a nine and a half. All right. So we've gone over the business, we've gone over the management, we've gone over the price/valuation, we've gone over the balance sheet for Palo Alto.
They've done this big acquisition. You know, that's on the identity side for CyberArk. And I think, you know, that's something that we need to pay attention to. But let's go over the scores and then let's give a couple takeaways and things that I think you should be paying attention to. It just a little foreshadow. All right.
So on the business side we gave it an eight I think it's very solid. Obviously you have high gross margins. You have improving net margins. Concern on the sales slowdown. Got watch that on the business side. The moat around the businesses. You know, for the big players and the big organizations that want to use the top tier premium service.
They want somebody with a track record and and the best technology right now that's Palo Alto. Obviously other players are going to get in there. On the business side, it is not a choice to have it or not have it. It's about okay, well, what platforms do we use for cyber security? It's a must have on the management side.
And they're on the one more thing to add on the AI side, these are very likely going to be enabled by AI, not threatened by AI. Obviously. That's my take, not investment advice. Remember educational purposes only on the management side giving them a good score. Again responsible manager of the balance sheet. We just covered that big acquisition. Like what they're doing.
They're being aggressive going on offense, trying to understand the market as well as they can, saying that identity is going to be a it's going to be really important for AI agents as an example. And getting out in front of that and doing a big acquisition like that, they got to execute it. And that's why it's an eight and not a eight and a half or nine, but a lot of credit for being aggressive.
They have a big distribution platform, great clients. They can do that with price valuation, you know, 50 times. Not excited about that. On the forward giving them a six there and on the balance sheet you know super clean sleeping super well at night 400 plus interest coverage ratio. Giving them a nine and a half that comes out to 7.875 for the score for Palo Alto.
The takeaway something that I really would pay attention to is, how are they going to execute on this CyberArk piece? And embedded in that is, how are they going to continue to take advantage of being enabled by AI rather than displaced by having AI help their business, not harm their business? Integrating CyberArk, integrating, you know, what they're doing all across their platform and distributing it across their really established customer base and growing that from there.
So that's what I would be watching for. That's management obviously. So stay tuned to what's happening with the CyberArk acquisition on Palo Alto. And how are they're using AI to enable their business. Again, that's Palo Alto Networks ticker PANW with a 7.875 for overall and eight on the business and eight on management, six on the price versus valuation, 9.5 on the balance sheet.
That's it for Palo Alto. And that's it for this episode with “Market News with Rodney Lake.” We'll see you back on the next episode. Thank you.