See Palo Alto Networks: Some good, some not so good. This prediction has largely come true, as revenue is growing by "only" 15% this year, its slowest rate in 15 years, with the share price stagnant since then.
However, the operational leverage linked to the platform effect—the strength of Palo Alto's business model, which offers a unified cybersecurity solution to its customers—is working to its full advantage: while revenue has increased by "only" 33% in two years, operating profit has almost tripled over the same period.
It is the quality of this model that has earned Palo Alto an elite multiple. It should be noted that despite the plateau reached by the share price, its valuation remains impressive, equivalent to a multiple of over 100x earnings.
It should also be noted that this profit would be twice as high if Palo Alto put a stop to stock option-based compensation—another contentious issue. In 2025, this variable compensation will once again exceed the net income available for distribution to shareholders.
This is without even mentioning the massive share buybacks to offset the dilution caused by these stock options—a genuine operating expense, hidden in the accounts and margin calculations, but nevertheless very real.
A few weeks ago, the Santa Clara-based company made extensive use of its shares – its potentially overvalued currency – to finance the $25bn mega-acquisition of Israel's CyberArc.
This transaction, based on a multiple of 25x the target's revenue, will be criticized by skeptics as a headlong rush to compensate for growth that may have reached its peak.
