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Stock Strategist

Firewall Leader Set to Expand

We believe Palo Alto Networks is an attractive investment in cybersecurity.


On the way to taking the firewall market crown,  Palo Alto Networks (PANW) developed considerable customer switching costs, in our view. We have raised our economic moat rating to narrow from none and are sustaining our positive moat trend rating. Palo Alto is expanding its subscriptions to cover hybrid cloud security concerns with items such as analytics, automated response, and machine learning, which we see as growth catalysts to supplement its strong firewall offerings. We expect the company will gain significant operating leverage in the coming decade as recurring subscription and support revenue streams flow from its expansive customer base. Given our higher top- and bottom-line expectations, we have raised our fair value estimate to $305 per share from $217. We believe this 4-star stock represents an attractive investment opportunity in the cybersecurity market.

Palo Alto became a leading cybersecurity provider with its next-generation firewall appliance, forever altering the requirements of this essential piece of networking security. Its offerings grew to include diversified security subscriptions that attached to firewall appliances, as well as solutions such as protection and automated responses for cloud-based traffic and data, software-as-a-service applications, and endpoints. In our view, cybersecurity will remain a top concern for enterprises and governments as the growing quantity of data and traffic being generated outside of centralized data centers increases the possible attack vectors and drives up security management complexity. We think IT teams are clamoring for security consolidation, and Palo Alto’s security operating platform helps centralize security orchestration and management. We believe the ability to add technologies via subscriptions in the Palo Alto framework can alleviate security complications by providing a more holistic solution, which equates to sustainable demand for the company’s solutions.

Mark Cash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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