Palo Alto Networks’ ($PANW) 2024-Q4 corporate earnings analysis
Editor’s Note: a previous version of this article had an incorrect calculation in the model for Free Cash Flow (FCF) and the associated visualization chart. The article has been edited with the correct data.
Key Highlights
- Company Board of Directors (BoD) passes an extension of their stock buyback program, allowing up to another $500m of capital to be used for buybacks. Currently company is authorized to buy back up to $1B worth of stock
- 325.1M shares outstanding (used for EPS calculation)
- 2024-Q4 revenue increase 12% YoY to $2.2B (2023-Q4 revenue was $2.0B), FY2024 revenue increased 16% YoY to $8.0B
- Net income (non-GAAP) 2024-Q4 $522.2M, meaning EPS of $1.51 per diluted share
- Future expectations for 2025-Q1 are: revenue range of $2.1–2.13B (inc. of 12–13%); EPS of $1.47–1.49 (inc. of 7–8%) per diluted share. FY2025 expectations are: revenue of $9.10–9.15B, EPS of $6.18–6.31 per share
A look at operating margin
Palo Alto uses the following formula for calculating non-GAAP operating margin, which is the figure used to analyze how efficient the company is performing its core business model before interest and taxes are taken out.
Where, Non-GAAP Operating Income is operating income plus share based compensation, share-based payroll tax expense, acquisition costs, amortization expenses of intangible assets, litigation expenses, and any restructuring costs.
So let’s dive into these components and verify that the company is performing how it is stating it is. For this, I’m using the total year figures.
- Company claims 27.3% operating margin
Total Revenue = $8,027.5 (in millions)
Operating Income = $683.9
Share based compensation including payroll tax expense = $1,161.7
Acquisition expenses = $13.6
Amortization expenses = $119.0
Litigation expenses = $211.5
Restructuring expenses = $0.0
Summing this up, we find that non-GAAP operating income comes out to be $2,189.7, leading to an operating margin of ~27.3%
I wanted to take a look at the historical operating margin the company has had. Here is the breakdown for the last five years of annual data:
5 Year History
I find it useful to look back at the historical trends of the company to analyze how well they are doing their job. There’s an endless supply of research data points that you can find online using services like Yahoo Finance, Zacks.com, SeekingAlpha, and more. But here are the things that I like to focus on the most:
- Total Revenue
- Net Income
- Diluted EPS (GAAP)
- Debt-to-Asset Ratio
- Free Cash Flow
So for Palo Alto I compiled the following data:
And I’m a very visual person. So below is the series of trends and charts of these figures.
There are several things that I like in this data, and one big component that is a bit cautionary, in my opinion.
- The company has been consistently growing revenues for years now, even through the Covid 19 pandemic. Largely because they’re in the cybersecurity space, which is an all important industry as more of the world becomes dependent on tech infrastructure. Likewise, I noticed they invested heavily into their product before turning a profit in 2023, but we now see exponential growth coming this year.
- Diluted EPS growth is great so far. The company is using an aggressive share buyback program to continue this growth into the future.
- Free cash flow is growing steadily and consistently. But as it stands today, the company currently has enough Free Cash Flow to cover only about half of their Total Current Liabilities
- My biggest gripe is with the high Debt to Asset ratio. Despite Palo Alto taking a chunk out of their liabilities this year, they’re still sitting at roughly 75% leveraged, which is bit too high for my risk profile.
There are several ways that Palo Alto Networks can tamp down on this debt. They can continue this hyper growth we’re seeing and essentially grow out of their debt or they can commit more free cash flow to debt repayment. We typically see the former in the tech industry because they are more likely to continue expansive growth for several years before leveling off.
Final Thoughts
I am very impressed by the figures that Palo Alto Networks were able to accomplish in 2024. It’s definitely a company that will continue to be on my radar, but as for putting into the portfolio, it’s not really in the position for my investing thesis at the moment.
Here is a look at the yearly stock chart for $PANW
With continued investment into data centers and tech/AI infrastructure here in the US, I do expect this company to continue growing for years to come. But at this current stock par price, there’s the reality that that expected growth is already priced into the company, leading to such as high par price per share.
