Palo Alto announces the largest product launch

abhisht is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Palo Alto (NYSE: PANW) provides network security solutions that protect business networks and allow them to run complex and rapidly growing applications on their networks. Since its inception in 2005, the company has been aggressively focusing on the research and development front, resulting in the introduction of many next generation products. Its success story can be easily seen in its more than 10,000 customers located across 100 countries.

Palo Alto successfully delivered a strong Q1 ’13 performance with revenue growth of 14%. The primary reason for this growth is its aggressiveness in introducing new products. Product like the VM -Series, a virtualized next generation firewall, and the M-100, a dedicated high performance management appliance that looks promising for boosting the future prospects of Palo Alto.

In line with its expansionist policy, the company has recently added new customers like CITRIX, RSA, SafeNet, and Swivel. These newcomers will help the company increase its forward revenues. Not only is it increasing its customer base, but Palo Alto is also launching new products that will further boost its business prospects.

However, the software industry's basic requirement is skilled manpower. Palo Alto does not currently maintain any employment arrangements with its employees to work for a specified period of time. This means that employees are free to leave Palo Alto at any point in time. If Palo Alto fails to attract and retain the best employees, its success story may get distracted. I believe that less financial resources in comparison to HPQ and IBM  will restrict the capacity of Palo Alto to attract and retain talented employees. This may have a negative impact on the Palo Alto's performance.

Though the company has seen substantial growth in the past, I don’t expect that the same will continue in the future. As its growth in revenue will decelerate, the company will experience increased stock volatility. Also, I believe that the operating expenses of Palo Alto will increase when the competition intensifies in future, as more resources will be deployed to enhance service and product quality.  

International Business Machines (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ) are Palo Alto's major competitors. Both companies have recently launched a stream of acquisitions for large network security networks like Check Point Software Technologies Ltd. and Fortinet Inc., to name few.  I believe both of these companies have wider and more diversified product bases, which give them an advantage over Palo Alto. Even though Palo Alto has launched a stream of new products, it still deals in a particular type of security network, which gives a edge to both of its competitors. Also both, IBM and HPQ have larger resources, which leave them free to invest a significant amount in R&D to develop new and superior products, allowing them to give comprehensive solutions to the customers.

Even though Palo Alto is growing at a substantially higher rate than either of its larger competitors, this will not continue forever. Its industry is a service industry where human capital plays an important role. Palo Alto does not make any employment contract with its employees to work for a specified period of time, and I believe that there may be major exodus of the key employees that may impact the stock negatively. Hence, I believe that the stock will remain volatile and should be sold.

akgupta88 has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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