Why Palo Alto Networks May Be A Good Buy
Rij is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Palo Altois scheduled to go public this week. There is a lot of buzz on the Internet on this now. The pricing is targeted to be between $34 and $37. Although the company is new (only seven years old) and tiny compared to some of the giants in the industry (Cisco, Checkpoint), it has a significant advantage: it produces the next generation firewalls.
Enterprise security is an area that is likely to continue to grow over the next few years, as more hackers get more sophisticated and cyberterrorism becomes a possibility. Recent hacking of passwords from LinkedIn and Yahoo are only some examples of the damages. With more and more data being moved into virtual networks and “clouds”, the importance of security is likely to increase. Based on this, companies focusing on this area are likely to see increase in growth, especially those that target new technologies to defend against hackers.
The key difference between the current firewalls that are used in most organizations and the next generation firewalls is that the new firewalls offer protection throughout all seven layers of OSI (Open Systems Interface) model – a standard telecommunications protocol. They use technology to pickup on patterns of attack rather than attacks on port. Thus, they result in less attack, with less comparative computing resource usage for the similar results. This translates to cost avoidance and cost savings for the organizations.
Several big organizations are currently eyeing this new technology to replace existing firewall installations. One of the front runners in this area is Fortinet (NASDAQ: FTNT), which recently has received buy recommendations from some analysts, although the share recently declined somewhat over the last week. In comparison to Fortinet, which has over 157MM shares outstanding,Palo Altois floating only 4.7MM shares. The pricing is targeted at a “sweet spot”. Although the company hasn’t turned a profit yet on an annual basis, between 2010 and 2011, the equipment sales of the company grew by over 134%, and has doubled since then. However, the mid point of Palo Alto Networks’ price range values the company at approximately $2.4Bn – around 11 times sales of $220mm in the 12 months upto April 30, according to Bloomberg.
Due to the buzz in the market, it is possible to see an uplift of the price immediately after the opening. I would personally watch the stock for the right moment to buy, avoiding any frenzy. Given the prospects, though, I will certainly keep it in my potential buy list.
I have stock positions in Fortinet. I may also initiate a position in Palo Alto Networks within the next 72 hrs. 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.If you have questions about this post or the Fool’s blog network, click here for information.