Palo Alto Networks (PANW) offered an optimistic outlook on the growing market for cyber and cloud security on Wednesday, boasting that its aggressive acquisitions will allow it to continue to stave off growing competition.
"Our belief is, as we see this cloud market go to potentially $1 trillion over the next five years, there is a huge opportunity for cloud security to play a relevant role in allowing these customers to make their cloud journey over the next three to five years," CEO Nikesh Arora said in an investor presentation. "We anticipate in cloud security, there is an opportunity for us to become a platform of choice and customers not have to deal with the problem of too many tools, too many vendors, too many alerts and too much manual labor."
A presentation accompanying Arora's comments pegs the total addressable market (TAM) for Palo Alto at a staggering $72.6 billion by 2022. The burgeoning market is a key factor promoting his raise of billings estimates over the coming years.
"The combination of its market leading technology, breadth of solutions that tied together network, endpoint, and orchestration/analytics along with solid go to market execution is helping the company gain market share against legacy incumbents like Check Point (CHKP) and Cisco (CSCO) ," J.P. Morgan analyst Sterling Auty said. "We believe these positive trends will continue for the foreseeable future and that above market growth rate will create operating leverage that generates attractive cash flow growth that underpins our Overweight rating."
New Threats Detected
With such a fast growing market, the amount of competition in the space is now much fiercer than simply the long-existent legacy competitors.
In the face of the budding competition, Arora was adamant that his company commands a dominant position.
Arora highlighted the displacement of Zscaler and Symantec (SYMC) on a major European healthcare provider, a fortune 50 retailer, and a $10 million deal that the company took from Zscaler for its Prisma access cloud security program.
On a day where much of the market is green, Zscaler stock slipped as much as 5% after the contentious comments from Palo Alto management.
Arora added that the cloud security wins in the quarter also came at the expense of Fortinet (FTNT) , Cisco, and CrowdStrike for both private and governmental contracts, with more mixed stock implications for that group.
"We continue to have high win rates against our competition and add thousands of new customers every quarter," he concluded. "In Q4, we added nearly 3,000 new customers and are now privileged to have won nearly 65,000 customers."
However, the laser focus on competition for much of the presentation was a bit worrisome for some more skeptical stock watchers.
"Much of the presentation attacked competitors ZS, CRWD, SYMC and FTNT. A takeaway from much of the bravado is that these markets remain highly competitive, evolving, and face the risk of price erosion," Credit Suisse analyst Brad Zelnick said. "In particular, CTO Nir Zuck completely dismisses proxy architecture and the need for ZS, which seemingly contradicts what we see in the most discerning security use cases and even the company's own Prisma Access product."
He retained an "Underperform" rating on the stock, noting that the disruptive threat of upstart cybersecurity players should not be underestimated.
Fast-Moving Mergers and Acquisitions
One of the keys to not getting caught flat footed as technology shifts is a strong acquisition strategy that not only brings capabilities, but all-important tech talent under the Palo Alto Networks umbrella.
In just the past two years the company has rapidly acquired seven companies for $1.5 billion and increased headcount on its newest projects substantially by virtue of these deals.
"Over the last 12 months, we have taken our Prisma and Cortex teams from 500 people 1,500 people," Arora said. "We did that by hiring new people and acquisitions and effectively redeploying resources from what would have been part of our core business into our new business."
The company's acquisition of Zingbox for $75 million, which was announced on Wednesday, falls in line with the company's aggressive philosophy, this time adding to opportunity and talent expertise in IoT technology.
Arora added that the company could pursue a number of smaller "bolt-on" acquisitions as it progresses in its plans for cloud security.
Still there is concern that the aggressive strategy of M&A needs to be supplemented by more steady organic growth.
"This pace of deals is diluting the company's bottom line -- as evidenced by the guidance -- and is confirming analysts' fears that [Arora] is moving too fast on the M&A front," Jim Cramer's Action Alerts PLUS team wrote on Wednesday evening. "It's a topic we struggle with, because we understand how consolidation in cybersecurity is necessary, but we also like earnings growth."
While the added entities now within the Palo Alto purview may be positive for long-term growth in emerging technologies, leading Cramer's team to dub the stock a compelling "pure play in cybersecurity," that added impact on coming earnings releases will be important for investors to keep an eye on.For more on where Palo Alto stock could be headed in the near term, click here. For more on the management's effects on Zscaler, click here.