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3 Ways Palo Alto Networks Has Secured Long-Term Growth

By Harsh Chauhan – Apr 26, 2018 at 9:10PM

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These promising acquisitions will boost the cybersecurity specialist's capabilities in three fast-growing areas.

The global cybersecurity market has grown rapidly over the past few years as corporations, individuals, and governments have raised spending to ward off the ever-evolving threats from hackers. A Gartner forecast pegged cybersecurity spending at $71.1 billion back in 2014, and the research firm expects it to hit $96.3 billion in 2018.

Pure-play cybersecurity specialist Palo Alto Networks (PANW -0.51%) has done well to carve a strong position in this market, recording impressive revenue growth over the years.

PANW Chart

PANW data by YCharts. TTM = trailing 12 months.

The researcher Cybersecurity Ventures estimates that global spending on cybersecurity could exceed $1 trillion during the five-year period from 2017 to 2021. So Palo Alto has been lapping up smaller rivals to bolster its hold in this market, acquiring three companies in the space of just over a year. Its last three moves boost its capabilities in different areas, paving the way for robust long-term growth in fast-growing cybersecurity niches.

Hacker in a hoodie sitting with a laptop

Image Source: Getty Images

Palo Alto's latest move is a smart one

Palo Alto has just spent $100 million to acquire Israeli cybersecurity start-up Secdo, which was founded three years ago by two Israeli veterans who served in the army intelligence corps technology unit. Secdo specializes in endpoint detection and response (EDR) capabilities, and Palo Alto will integrate this service into its Traps endpoint protection.

The acquisition is expected to boost the Traps platform, as Secdo has advanced data collection and visualization capabilities that go beyond traditional methods. It should help Palo Alto customers more rapidly detect and respond to security breaches, which could eventually carve a bigger share of this market.

Palo Alto estimates that the endpoint security market was worth $4.4 billion last year, and could grow to $5.2 billion by 2020. Though the company doesn't spell out how much revenue it gets from endpoint security solutions, the growing adoption of the Traps platform is proof that Palo Alto has been making solid progress in this area.

Palo Alto introduced Traps less than four years ago, and it has more than 2,200 customers on this platform. It is growing impressively, with the Traps customer count increasing around 50% in just a couple of quarters, and the addition of Secdo's capabilities should boost Palo Alto's EDR business.

The improved capabilities of the Traps platform should also allow Palo Alto to tap into the antivirus (AV) market, which is expected to grow at 18% a year through 2022. Traps has been certified as a replacement for legacy AV software sold by companies such as Symantec and McAfee, giving Palo Alto access to another fast-growing market that should expand its addressable opportunity.

Going after the next big catalyst

Secdo is Palo Alto's second buy this year. Back in March, the company doled out $300 million to acquire Evident.io to bolster its capability in cloud security.

Just like your computer, data centers can also be hacked. In fact, we have already seen quite a few notable breaches in recent years. In 2013, personal details of 3 billion Yahoo! users were compromised. Cybersecurity companies are increasingly focusing on the cloud to protect data contained in remote servers and data centers, as they see a huge business opportunity here.

TechSci Research estimates that the global cloud security market could exceed $10 billion in revenue in the next three years, and Palo Alto needed to raise its game here given the presence of a bigger rival, Cisco (CSCO -1.12%). The networking equipment giant has been rapidly branching out into cybersecurity and has easily eclipsed its smaller rivals.

Cisco's advantage is that it can easily sell its cybersecurity solutions thanks to an established base of clients and partners. In February, Cisco announced that cloud computing services provider Rackspace will offer Cisco's next-generation Firepower security platform to its customers.

Palo Alto has a tough fight in the cloud security market, and the acquisition of Evident.io should give it a strong asset against Cisco and other rivals. Evident.io's client list is impressive, with names such as Walt Disney, Adobe Systems, and financial services provider Capital One.

And the Evident Security Platform also monitors applications on Amazon Web Services (AWS) and Microsoft's Azure Cloud, setting up stronger growth in cloud security, which Palo Alto is already witnessing as this segment's customer count has more than doubled in fiscal 2017. Evident.io could take this business to the next level.

Pursuing a hot tech trend with LightCyber

Palo Alto acquired LightCyber in February last year for $105 million, adding behavioral-based attack detection capabilities into its network security architecture. LightCyber's Active Breach Detection uses machine learning to quickly identify attacks using irregularities within the network.

Palo Alto has already integrated LightCyber's capabilities into its next-generation security platform with Magnifier Behavioral Analytics. This platform can automatically detect attacks in progress before any damage is done.

Simply put, Palo Alto's new platform will use artificial intelligence (AI) to thwart threats, a cybersecurity weapon that could create an $18 billion revenue opportunity by 2023 -- another fast-growing niche within the cybersecurity market.

More market share gains will result in stronger growth

Palo Alto's market share in cybersecurity has gone from just 1.9% five years ago to 9.2% at present. It estimates that its addressable market will hit $24 billion in 2020, though it won't be surprising if it exceeds that, as the recent acquisitions have expanded its reach.

Assuming Palo Alto manages to increase its market share to a conservative 10% in the next couple of years, its revenue could rise over 20% from the trailing-12-month levels. But growth could be even better if it gains more market share and its addressable market expands, which looks likely given the three smart acquisitions it has made.

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Adobe Systems, Cisco Systems, Gartner, and Palo Alto Networks. The Motley Fool has a disclosure policy.

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