MUMA COLLEGE OF B USI NESS S TUDENT- MANAGED INVESTMENT F UND NYSE: PANW 1 Current Price: $142 1 Intrinsic Value: $154 1 3Yr Target Price: $204 1 Implied Return: 44% Company Profile Recommendation Palo Alto Networks is the next-generation secu ri ty company, leading a new era in B uy cybersecurity by safely enabling applications and preventing cyber breaches for thousands of organizations worldwide. Price Performance Key Statistics 2017 0.25 0.2 0.15 O.> 0.05 0 Jill -O.os -0.1 -o. Z5 Investment Thesis - PANW -S&P 500 • Increased spending on cybersecurity by companies and governments due to significant number of high-profile cyber attacks • Adoption of a hybrid SaaS model will allow Palo Alto to receive recurring revenue from subscription-based services • Penetration into growing markets through new products and strategic acquisitions • Rapid development of the Internet of Things will make companies and governments more vulnerable to damaging cyber attacks Risks • Inability to remain innovative • Significant cyber attack on one of its customers • Adverse changes in macroeconomic conditions • Change in dynamics of relationships with channel partners NYSE: PANW I Equity Research I January 24, 2017 Analysts: Marc Costello, Jeremy Davis, Quan Nguyen, and Madison Suhr
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STUDENT-MANAGED INVESTMENT FUND 1 Implied Return: 44% ... · -o.Z5 Investment Thesis ... The market is expected to grow from $75 billion in 2016 to 175 ... its product segment have
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Palo Alto Networks is the next-generation securi ty company, leading a new era in B u y cybersecurity by safely enabling applications and preventing cyber breaches for
thousands of organizations worldwide.
Price Performance Key Statistics 2017
0.25
0.2
0 .15
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0.05
0 Jill
-O.os
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-o. Z5
Investment Thesis
- PANW -S&P 500
• Increased spending on cybersecurity by companies and governments due to significant number of high-profile
cyber attacks
• Adoption of a hybrid SaaS model will allow Palo Alto to receive recurring revenue from subscription-based services
• Penetration into growing markets through new products and strategic acquisitions
• Rapid development of the Internet of Things will make companies and governments more vulnerable to damaging
cyber attacks
Risks
• Inability to remain innovative • Significant cyber attack on one of its customers
• Adverse changes in macroeconomic conditions • Change in dynamics of relationships with channel partners
NYSE: PANW I Equity Research I January 24, 2017 Analysts: Marc Costello, Jeremy Davis, Quan Nguyen, and Madison Suhr
Investment Thesis Breakdown
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Increasing Cybersecurity Spending Due to Growing Cybercrime
In 2016, Yahoo! discovered two major cyber-attack events, the first one being the largest in history with over one
billion victims. This resulted in a financial loss to Yahoo! that summed in the hundreds of millions of dollars. Attacks
such as these have been increasing annually and affect corporations and government agencies alike. In 2015, the
U.S. government experienced 77,000 cyber-attacks, an increase of 10% from the previous year. Such attacks often
result in massive data breaches, which often lead to financial loss for victims.
Recent Cybercrime
Victims YAHOO! eb Linked 1m JPMorganChase 0
This reality has resulted in increased spending on cybersecurity by both the public and private sectors which is
expected to continue into the foreseeable future. The market is expected to grow from $75 billion in 2016 to 175
billion in 2020. We believe that Palo Alto is uniquely positioned to capitalize on this trend due to the efficacy of its
advanced cybersecurity platform.
Improving Revenue and Margins from a Hybrid-Saas Model
Networks has a 12.4% market share of the cybersecurity industry, which is third to Cisco and Checkpoint. The
company operates in two segments; products and services. These two segments make up 49% and 51% of
revenues respectively. Palo Alto Networks was founded in 2005 by a former Checkpoint engineer and is
headquartered in Santa Clara, California.
Products
Overview
Palo Alto's approach to cybersecurity starts with prevention. In order to prevent cyber attacks for companies and
governments, Palo Alto created its Next-Generation Security Platform. This platform's approach aims to prevent
cyber attacks by giving customers visibility into their network and preventing existing or new threats. The different
components of this platform are listed below.
Wildfire
Traps
WildFire is Palo Alto's cloud-based threat analysis service for its Next-Generation
platform users. WildFire works in conjunction with Next-Generation Firewall, Aperture,
and GlobaiProtect to analyze and prevent new or unknown threats. If a new file is
passed through the firewall, it will be sent to WildFire for analysis. WildFire then
analyzes the file and determines if it poses a threat. If so, all of WildFire users will be
notifited.
Traps is Palo Alto's advanced endpoint protection service, a replacement for traditional
antivirus programs. Traditional antivirus software has become obselete and is unable to
protect its users from advanced threats. Traps stops malware, identifies unknown
threats, and prevents them from harming customers' computers. Traps also utilizes
WildFire's capabilities.
NYSE: PANW I Equity Research I January 24, 2017 Analysts: Marc Costello, Jeremy Davis, Quan Nguyen, and Madison Suhr 4
Products (Continued)
Globa I Protect
Aperture
APERTU!Jf
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It is very common for companies to have employees work remotely from home on
laptops, tablets, and cell phones. When an employee does this, they are operating on
a separate network that may not be as protected as the company's own network. The
devices used remotely can bring harmful data back to the company and cause various
issues. GlobaiProtect secures those devices so that employees can work remotely and
safely bring their devices back to their company. GlobaiProtect protects personal
devices. Companies that adopt the bring-your-own-device model can secure selected
enterprise applications on personal devices.
Aperture is Palo Alto's solution to securing customers' SaaS applications. Many
enterprises use SaaS applications such as Google Drive and DropBox everyday. These
SaaS applications are independent and are not protected by enterprises' security.
Aperture solves this issue. A user of Aperture can add various SaaS applications to the
service and monitor the amount of users using each application. Aperture also notifies
administrators of any sensitive or malicious data that enters or exits the application. For
example, if a document is shared on DropBox that should not be shared, a notification
is sent to Aperture administrators so that they can address the issue.
Next-Generation Firewall
h - -Services
The Next-Generation Firewall is central to Palo Alto's Next-Generation Security
Platform. The firewall monitors all traffic on the platform and classifies it based on user,
content, and application. It works with WildFire to prevent attacks associated with the
cloud, with Aperture to prevent attacks associated with SaaS applications, and works
with GlobaiProtect to prevent attacks associated with remote devices.
Palo Alto's goal is to make the integration of its products seamless and easy. The company offers 24/7 support and
maintenance services to clients to complement the products it offers. This includes education services, which are
designed to inform employees of the functionalities of the platform. Consulting services are also available to aid
customers with their projects.
NYSE: PANW I Equity Research I January 24, 2017 Analysts: Marc Costello, Jeremy Davis, Quan Nguyen, and Madison Suhr 5
Industry
Since 2014, the cybersecurity index has been outperforming
the S&P 500. We expect this trend to continue for the next
several years due to security concerns surrounding the
Internet of Things, Bring-Your-Own-Device trends, and web
and cloud-based business applications.
According to Cybersecurity Ventures, cybercrime damages
are expected to cost the world approximately $6 trillion
annually by 2021, up from $3 trillion in 2015. As a result,
sales from cybersecurity products and services to counter
cybercrime could exceed $1 trillion cumulatively between
2017 and 2021.
North America accounted for the largest share of the
cybersecurity market in 2016 due to the number of large
technology vendors, technological advancements and early
adoption of cybersecurity. The U.S. government and
enterprises are spending large sums to strengthen their
cybersecurity capabilities.
120%
100%
80%
60%
40%
20%
0%
·20%
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- Cybersecurity Index - S&P 500
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
The U.S. government has increased its annual cybersecurity budget by 35% this year. J.P. Morgan Chase & Co.
recently doubled its annual spending for cybersecurity from $250 million to $500 million, wh ile Bank of America
admitted to having no budget constraint regarding its cybersecurity spending.
Competitive Advantages
Palo Alto Networks has several competitive advantages over its competitors due to the features and capabilities of
its Next-Generation Security Platform. Traditional firewalls identify network traffic by IP and port number, which
provide users with little information about what they are dectecting. Palo Alto's advanded platform identifies network
traffic by application, user and content. Because of this, users of Palo Alto's platform are able to have in-depth visibil
ity into all traffic and all applications, giving them more control and better protection against cyber threats.
Palo Alto's platform offers superior performance compared to traditional approaches and reduces the total cost of
ownership for users by simplifying their security infrastructure and removing the complications arising from using
several stand-alone security appliances and software products.
NYSE: PANW I Equity Research I January 24, 2017 Analysts: Marc Costello, Jeremy Davis, Quan Nguyen, and Madison Suhr 6
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Competition
Cybersecurity firms compete on four main factors: cost, features, integration, and brand awareness. Palo Alto
Networks has been able to capture 15% of the enterprise firewall market in 10 years. This is due to the development
of its products and successful marketing, which is vital in cybersecurity. However, Palo Alto still faces stiff
competition from Cisco, Juniper, IBM, Intel, FireEye, and other competitors. Below are Palo Alto's main competitors:
Cisco offers a variety of online security platforms for enterprises such as email
protection, fi rewalls, VPN security, and web security. Cisco's large size allows
them to invest heavily in R&D, giving them a competitive advantage. Security
firms spend billions each year to market their products to the world and Cisco
has the capital to do this on a massive scale.
Checkpoint provides both software and hardware for IT security worldwide.
Their portfolio of products includes endpoint, mobile, network, and data security.
Recently, Checkpoint has begun offering cloud security to compete with Palo
Alto's acquisition of Morta. Checkpoint has the second highest market share in
the cybersecurity market.
FireEye is a provider of cybersecurity services and equipment for various gov
ernments around the world. The firm is most recognized for advancements in
threat response services and intelligence feeds. FireEye has been making small
acquisitions to broaden its market exposure to enterprise.
Manufacturing & Distribution
I I I I I I I I I
CISCO
Check Poinf SOFTWARE TECHNOLOGIES LTD.
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Palo Alto outsources its manufacturing, repair, and supply chain management operations to an independent
contractor. This independent contractor assembles Palo Alto's products based on demand forecasts from the
company. The company bases these forecasts on historical trends and market analyses.
Distribution and sales of Palo Alto's products are done through its network of channel partners. Its Next Wave
Channel Partner program is focused on developing strong relationships with distributors and resellers with expertise
in the cybersecurity industry. These distributors are responsible for a large majority of revenues for Palo Alto.
NYSE: PANW I Equity Research I January 24, 2017 Analysts: Marc Costello, Jeremy Davis, Quan Nguyen, and Madison Suhr 7
Risks
Inability to Remain Innovative
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The cyber security services industry is highly competitive. To increase its market share in this industry, Palo Alto
must remain innovative and adaptive to the current technical environment. To do this, the company must attract and
retain highly-skilled personnel. Due to the competitive nature of the IT labor market in San Francisco, where the firm
is headquartered, Palo Alto could fail to attract and retain the best talent, which could inhibit its ability to innovate
effectively.
Adverse Changes in Macroeconomic Conditions
Palo Alto's customer base is comprised of medium and large enterprises globally. Because business spending tends
to correlate with economic conditions, an economic downturn could influence its customers to spend less on cyber
security services or to seek more economic options. For this reason , any downturn in the macro economy could
negatively impact the firm.
Significant Cyber-Attack on One or More of its Customers
Palo Alto has built its reputation and brand through the efficacy associated with its product and service offerings.
Due to this truth, any significant cyber-attack or data breach concerning one or more of its customers could have a
devastating impact on the company. An event such as this would likely tarnish the company's brand and significantly
lower its growth prospects.
Change in Dynamics of Relationships with Channel Partners
Palo Alto depends on its channel partners for the sales and marketing of its products and services. In 2016, two
channel partners represented 58.2% of the company's total revenues. The company's contracts with its channel
partners are renewed on an annual basis. Continuation of these contracts can be halted by either party in advance
of an upcoming renewal. If one of these relationships is terminated at any time, it could have devastating effects on
the company. Furthermore, if Palo Alto's channel partners allot less effort to the marketing of its offerings, the
company's revenues could be negatively impacted.
NYSE: PANW I Equity Research I January 24, 2017 Analysts: Marc Costello, Jeremy Davis, Quan Nguyen, and Madison Suhr 8
Leadership
Mark Mclaughlin CEO
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Mclaughlin has served as president, CEO, and as a member of Palo Alto's board of directors since 2011 . Prior to Palo Alto, Mclaughlin served as president and CEO of Verisign after serving as COO and EVP. Mclaughlin currently serves on the board of directors for Qualcomm Inc. (NASDAQ:QCOM).
Nir Zuk Chief Technology Officer
Zuk co-founded Palo Alto and has since served as its CTO. Before Palo Alto, Zuk was CTO at NetScreen Technologies, which was acquired by Juniper Networks in 2004. Prior to NetScreen, Zuk was co-founder and CTO at OneSecure. Zuk was also a principal engineer at Check Point Software Technologies.
Rene Bonvanie Chief Marketing Officer
Bonvanie has more than 25 years of executive management and marketing experience in enterprise technology. Prior to Palo Alto, Bonvanie served as EVP and CMO at Sap. Before SAP, Bonvanie served as SVP at VERITAS Software Corporation.
Steffan Tomlinson Chief Financial Officer
Tomlinson has served as Palo Alto's CFO since 2012. Prior to Palo Alto, Tomlinson served as CFO at Aruba Networks and was heavily involved in its I PO. Before Aruba Networks, Tomlinson served as the first non-founder employee at Peribit Networks and rose to become CFO.
NYSE: PANW I Equity Research I January 24, 2017 Analysts: Marc Costello, Jeremy Davis, Quan Nguyen, and Madison Suhr 9
Free Cash Flow to Equity Valuation
Net Income J Current Asset change Accounts receivable I Other Total Asset
Current Lib change Accounts payable I Deferred revenues