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Amidst COVID-19 Induced Market Panic, Palo Alto Networks Goes Shopping

By Nicholas Rossolillo - Apr 3, 2020 at 8:06AM

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Cash -- with low debt -- is king for a reason.

In the midst of the coronavirus turmoil that has whisked stocks away into bear market territory, Palo Alto Networks (PANW -1.46%) has made some interesting moves. No, its stock has not been immune to the sharp sell-off -- shares are down 28% year to date. Actual business results have been impacted as well with the company's fiscal 2020 second quarter results missing its own expectations.

However, it's just this kind of economic disruption that paves the way for some businesses to strengthen their position in the long run. Palo Alto just announced yet another acquisition, CloudGenix, for $420 million. Per its last quarterly update, the cybersecurity leader is also doing an accelerated share repurchase program this quarter. Shelling out gobs of cash right now may seem like the wrong move, but there are good, counterintuitive reasons Palo Alto should be rewarded for doing so.

A faceless person in hooded sweatshirt on a laptop, signifying cyber crime.

Image source: Getty Images.

The need for edge network security

In the last month, what was already a long-standing and ever-growing demand for next-gen cybersecurity just got a massive boost. Shelter-in-place and work-from-home orders have exposed many organizations as woefully underprepared for the task. Not only is securing cloud-computing systems a massive need, but so is securing the millions of devices connected to them, especially now as private internet connections from home are being used to access sensitive data and organizations' critical cloud-based operating systems. 

That's where cloud-based security services come in, which are best suited to tackle the unique challenges presented by a suddenly very remote workforce that isn't domiciled in an office building. Cloud security has been the fastest growing segment of the cybersecurity industry, and upstarts like Zscaler (ZS -1.86%) have been able to make quick headway. Industry veterans like Fortinet (FTNT -1.00%) have been taking a more measured approach by slowly developing new services in-house. 

And then there's Palo Alto Networks, the largest cybersecurity pure-play out there that has been acquiring smaller firms to build its own cloud-based and edge network service suite. It's dropped a couple billion dollars on takeovers the last few years, and the $420 million in cash to get CloudGenix adds to that number in a big way. What Palo Alto gets, though, is some 250 CloudGenix customers (most of them in the Fortune 1000), the company's software-defined network security (listed as one of the visionary leaders on Gartner's Magic Quadrant), and the ability to use CloudGenix's technology to quickly onboard new customers as it tries to meet the influx of needed remote security service.

Buy when others are fearful

Will the spending spree pay off? Time will tell, but so far, Palo Alto's acquisitions have put it in the lead as the largest cloud security firm and helped it continue to post growth even as industry sales have decelerated in the last year. However, there's a good chance that higher use of all things digital due to the fight against coronavirus could create a new bump in revenue trajectory.

What I like most about this move, though, is that in addition to going shopping, Palo Alto is also doling out a big shareholder payout via a $1 billion accelerated share repurchase program that will get under way during the current quarter. With share prices down in the dumps, applying the old Warren Buffett mantra -- "greedy when others are fearful" -- makes sense. That $1 billion equates to approximately 6% of Palo Alto's current market capitalization.

But where is all this money coming from? Besides the nearly $1 billion of free cash flow (money left after cash operating expenses and capital expenditures are paid) generated in the last year, Palo Alto had $3.1 billion in cash, equivalents, and short-term investments, and $1.5 billion in convertible debt on its balance sheet at the end of Jan. 2020. Not only is this a very profitable enterprise, it has deep pockets.  

Put simply, though the news is overwhelmingly bad at the moment, Palo Alto Networks entered the crisis from a position of strength and is deploying capital to set itself up for even more growth once the dust settles.

Nicholas Rossolillo owns shares of Fortinet and Palo Alto Networks. The Motley Fool owns shares of and recommends Palo Alto Networks and Zscaler. The Motley Fool recommends Fortinet and Gartner. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Palo Alto Networks, Inc. Stock Quote
Palo Alto Networks, Inc.
$516.90 (-1.46%) $-7.65
Fortinet, Inc. Stock Quote
Fortinet, Inc.
$52.41 (-1.00%) $0.53
Gartner, Inc. Stock Quote
Gartner, Inc.
$312.31 (-1.10%) $-3.48
Zscaler Stock Quote
$175.27 (-1.86%) $-3.33

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