Morningstar | Palo Alto Continues Growth as Cloud Security Becomes Critical; Maintaining FVE of $217
No-moat Palo Alto reported decent results for its first quarter of fiscal 2019. Although the subscription and support business grew strongly, Palo Alto continues delivered a negative GAAP operating margin for the quarter. With our longer-term view of the firm, we believe Palo Alto will be able to generate operating leverage after grabbing a larger customer base and we are maintaining our fair value estimate of $217 per share.Revenue grew 31% to $656 million with $240.5 million from products and $415.5 million from subscriptions and support. SaaS-based subscriptions grew by 37%, compared with last year, to $231 million. Palo Alto is still operating in the red on a GAAP basis by posting a $32 million operating loss and an EPS loss of $0.41 per share for the quarter. These results are not alarming as Palo Alto is still working on land grabbing and we expect positive operating income in fiscal 2020. We believe Palo Alto's efforts to get in front of enterprises moving to the cloud while adding automation to remove network security complexities is paying off with customer demand. The recent acquisition of RedLock for $173 million in cash will help Palo Alto's cloud threat defense technology. Additionally, we posit that Palo Alto's previous acquisition of Evident will give the company a more unified approach to cloud security with analytics and monitoring.
For the next quarter, Palo Alto expects to achieve $675 million-$685 million in revenue (24%-26% year-over-year increase) with non-GAAP EPS of $1.20-$1.22. Palo Alto's announced plans to enter the service provider market and, in our view, this is a great long-term growth opportunity. We posit that as 5G networks roll out and Internet of Things devices proliferate, networks will become more complicated and security will be of the utmost concern. Palo Alto may be able to profit from network threats rising with the increased traffic across networks from the growing quantity of communication devices.
Palo Alto Networks provides a platform that allows enterprises, service providers, and government entities to secure their organizations. The company's platform uses a traffic classification engine that identifies network traffic by application, user, and content and provides security across the network, endpoint, and cloud. The company's product, subscription, and support offerings include: firewall appliances and software; and Panorama, which is a centralized security management solution for global control of various firewall appliances and software deployed on an end-customer's network as well as in their instances in public or private cloud environments as a virtual appliance or a physical appliance.
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