Palo Alto Networks Inc (PANW)

Conclusion

Palo Alto Networks is a US cybersecurity company. It sells network security, cloud security and security operations platforms, backed by subscription services and professional services. At 330.89 USD on 2026-11-09, its market capitalisation is 270.8 billion USD.

The verdict is overvalued. The fair value band runs from 104.88 to 157.32 USD, with a midpoint of 131.10 USD, so the margin of safety is -60.4%. Against their own ten-year medians, EV/EBITDA is 504.2x against 246.1x, P/FCF is 65.8x against 30.4x, and P/S is 23.6x against 10.1x. P/B, at 9.9x against a median of 21.3x, is the exception. The DCF gives 104.95 USD per share at a discount rate of 9.7%, and the fair value from historical multiples is 157.25 USD. The reverse DCF implies growth of 31.3% a year, against revenue growth of 22.0% over five years and free cash flow per share growth of 17.6%.

Three numbers support the case. Net debt to EBITDA of -1.07 means the company holds net cash. The Altman Z-score of 8.07 is in the safe zone. Revenue has grown in all ten years, at a five-year compound rate of 22.0%. Three numbers weaken it. ROIC of 1.3% sits well below WACC of 9.7%, a gap that makes ROIC minus WACC -8.4%. EPS has fallen at a compound rate of 14.5% over three years. The share count has risen at a compound rate of 5.7% over five years, which means dilution rather than buybacks.

Financial health

Financial strength is green, held up by net cash and a high Altman Z-score, with liquidity the only soft spot. Net debt to EBITDA is -1.07, and debt to equity is 0.09. The current ratio is 0.87 and the quick ratio is 0.73, both below one. The company does not report its interest expense, so interest coverage is not available. The Altman Z-score is 8.07, in the safe zone. The Altman model was designed for manufacturers, and this company is a software business, so the figure is only indicative. Insolvency risk is low, about 0.3% by the estimate of the Ohlson model over one to two years.

Earnings quality

Earnings quality is yellow. Cash generation is strong: free cash flow conversion is 13.4x on a trailing basis and 3.6x over five years, and the accrual ratio is -11.8%, which suggests earnings are backed by cash. Stock-based compensation is 15.5% of revenue, and free cash flow after it is 2.34 billion USD. The share count has grown at 5.7% a year over five years. The Piotroski score is 3 out of 8 evaluable tests. The Beneish M-score is not available. The company beat estimates in six of the last eight quarters, though its average surprise was -1.3%. Current-year estimates were revised up 1.3% over 90 days, while next-year estimates were revised down 6.2%.

Profitability

Profitability is yellow, with returns on capital the main weakness. Gross margin is 70.4% against a ten-year median of 71.9%. Operating margin is 6.1% against a median of -2.7%, and net margin is 2.7% against a median of -3.8%. Margins have been volatile, with a stability reading of 36.6. ROIC is 1.3% against WACC of 9.7%, so ROIC minus WACC is -8.4%, and the five-year median ROIC is 16.1%. ROE is only 1.1%. The DuPont split shows a 2.7% net margin, an asset turnover of 0.24x and an equity multiplier of 1.76x. Leverage is not inflating the return, because the return is already very low.

Growth

Growth is yellow, with strong top-line growth offset by falling earnings per share. Revenue compounded at 18.5% over three years, 22.0% over five years and 23.6% over ten years. Revenue grew in all ten of the last ten years. Earnings per share fell at a compound rate of 14.5% over three years. Free cash flow per share compounded at 11.9% over three years, 17.6% over five years and 17.0% over ten years. Analysts expect next-year earnings per share growth of 16.8%.

Valuation

Valuation is red, as the price sits far above every measure of fair value. P/E is 882.1x, and the ten-year median is not available because the history covers only four points. EV/EBITDA is 504.2x against a median of 246.1x, a premium of 104.9%. P/FCF is 65.8x against 30.4x, a premium of 116.8%. P/S is 23.6x against 10.1x, a premium of 134.4%. P/B is 9.9x against 21.3x, a discount of 53.8%. The DCF gives 104.95 USD per share, using a discount rate of 9.7%, 20% growth in the first stage and 2.5% terminal growth. The fair value from historical multiples is 157.25 USD. The reverse DCF implies 31.3% growth, against 22.0% revenue growth and 17.6% free cash flow per share growth over five years. The company pays no dividend.

Risks

The main risk is that the price assumes growth the business has not delivered. The reverse DCF implies 31.3% growth, well above the five-year revenue growth of 22.0%. If growth falls toward the historical rate, the premium multiples would be hard to sustain. ROIC of 1.3% below WACC of 9.7% means new capital is currently not earning its cost. Falling earnings per share and 5.7% annual share count growth reduce the value left for each shareholder. Weak liquidity, with a current ratio of 0.87, is manageable given net cash but reduces the margin for error. Interest coverage and the Beneish M-score are not available. The cost of debt is assumed rather than observed. The analysis has no debt maturity schedule and no revenue by segment, so it cannot test refinancing risk or the mix of growth across product lines.