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Citation - First Quarter 2023


PALO ALTO NETWORKS: well positioned to deal with an increasingly complex cyber security threat.

Portfolio Manager
Estimated reading time: 9 minutes 10 seconds read

Cyber security, an essential aspect of modern society, has grown increasingly critical as our reliance on technology and digital infrastructure has expanded. Over the past 20 years, the industry has evolved in response to new threats and technological advancements.

In this article, we discuss the importance of cyber security and how the industry has transformed to protect digital assets and maintain the security and integrity of our interconnected world. We also look at Palo Alto Networks, a key holding in the Global Greats equity strategy, and a key role player in a dynamic and increasingly important world.

The Growing Importance of Cyber security

As the internet has become an integral part of our daily lives, so too has the need for robust cyber security. With more devices connected to the internet, the potential for cyber attacks has increased exponentially. Cyber security is crucial to protect sensitive information, maintain privacy, and ensure the reliability of critical infrastructure. In today’s digital age, a single cyber-attack can lead to significant financial, reputational, and operational damages, highlighting the need for strong cyber security measures. Cyber threats have become more sophisticated and frequent. The rise in the number of data breaches, ransomware attacks, and Distributed Denial of Service (DDoS) attacks has shown that no organisation or individual is immune to these threats. The increasing complexity of cyber attacks necessitates innovative and adaptive cyber security solutions to combat emerging threats.

In response to the scale and sophistication of cyber security threats, the industry has evolved in the following important ways:

  • Enhanced Security Measures: As cyber threats have evolved, so too have the methods used to defend against them. In the early days of the internet, simple antivirus software and firewalls were sufficient for protection. However, as attackers have become more sophisticated, the industry has developed advanced tools such as intrusion detection and prevention systems, encryption, multi-factor authentication, and behavioural analytics.
  • Threat Intelligence: Sharing information about emerging threats has become a vital aspect of cyber security. Organisations now collaborate to exchange information and develop strategies to counter new threats. This collaborative approach has led to the creation of threat intelligence platforms and Computer Emergency Response Teams (CERTs) that work together to mitigate risks.
  • The Role of Artificial Intelligence (AI) and Machine Learning (ML): The incorporation of AI and ML in cyber security has been a game-changer. These technologies enable security systems to learn from past experiences and adapt to new threats, thereby improving overall security. AI-powered solutions can identify patterns, predict attacks, and initiate proactive countermeasures. In this regard, companies like Palo Alto Networks benefit from a virtuous AI network effect as illustrated in Figure 1.
  • Regulatory Developments: Governments worldwide have recognised the importance of cyber security and have introduced regulations to protect citizens and businesses. For example, the General Data Protection Regulation (GDPR) in the European Union and the California Consumer Privacy Act (CCPA) in the United States have set new standards for data protection and privacy, mandating that organisations invest in robust cyber  security measures.
Fig 1: AI network effect for modern cyber security companies

Palo Alto Networks

Palo Alto Networks, a leading provider of cyber security solutions, has emerged as the world’s biggest standalone cyber security company with over 80,000 clients and with a market capitalisation of $60 billion. Established in 2005 by Israeli-American, Nir Zuk, Palo Alto Networks aimed to address the limitations of existing network security solutions, leading to the development of a firewall for fine-grained control of applications. Palo Alto Networks has a strong track record of technological innovation and a comprehensive product portfolio. The company’s next-generation firewalls, featuring application-awareness and user-identification capabilities, have set industry benchmarks and continue to be a major driver of revenue. Launching its first enterprise firewall in 2007, the company was soon recognised as a leader in Gartner’s Magic Quadrant for Network Firewalls, a position it maintained for eight consecutive years. The company is now recognised in 13 categories by Gartner, up from nine in 2020.

Palo Alto Networks has also expanded its product offerings through acquisitions and strategic partnerships. Notable acquisitions include cloud security companies RedLock and, endpoint protection provider Cyvera, and machine learning-based threat detection company LightCyber. These acquisitions have helped the company enhance its product portfolio and offer integrated, end-to-end security solutions to customers.

Product Portfolio

Palo Alto Networks’ product portfolio encompasses a range of cutting-edge cyber security solutions designed to tackle the myriad challenges faced by organisations today. These products can be divided into three main categories:

  • Next-Generation Firewalls (Strata): These firewalls are the foundation of the company’s cyber security offerings, providing robust security measures against a variety of threats, including advanced persistent threats (APTs), malware, and exploits. With features such as application identification, user-based policies, and integrated intrusion prevention systems (IPS), Palo Alto Networks’ NGFWs deliver unparalleled network security.
  • Cloud Security (Prisma): With the increasing adoption of cloud services, securing these environments has become a top priority for organisations. Palo Alto Networks’ cloud security solutions include Prisma Cloud, a comprehensive cloud security platform that offers visibility, compliance, data security, and threat protection across various cloud infrastructures and applications.
  • Advanced Endpoint Protection (Cortex): To counter the ever-evolving landscape of cyber threats, Palo Alto Networks developed Traps, an endpoint protection solution that leverages AI and machine learning to detect and prevent advanced malware, ransomware, and other sophisticated attacks on endpoint devices.
Table 1: Industries which Palo Alto Networks serve (

Investment case

The investment case for Palo Alto is premised on a number of pillars which include:


  1. The non-discretionary nature of the product/service

We prompted ChatGPT 4 to collate publicly available company communication transcripts by company executives to order how they viewed IT category spending by degree of discretion and rank score it (10=completely non-discretionary, 0=very discretionary). Table 2 summarises the findings and re-emphasises just how critically important cyber security is viewed as being.

Table 2: Industry ranking of IT spending category by level of discretion (ChatGPT4,2023)

2.  A highly fragmented industry with scope for more cross selling

The cyber security industry is highly fragmented, with numerous vendors offering a wide array of products and services. It is common for companies to use multiple cyber security vendors for various reasons, i.e., specialisation, diverse IT environments, best of breed approach, mergers and acquisitions, and risk mitigation. From a client’s perspective, having one vendor managing key parts of its cyber security helps to alleviate challenges associated with having disparate security solutions for various parts of the overall IT stack.

Morningstar cites numerous industry studies, which observe that companies are presently employing between 60 and 80 distinct security tools, although they aim to reduce this figure to a range of 15 to 20 essential solutions. In light of this evolving environment, there is a potential for platform-oriented cyber security providers, like Palo Alto, to assist businesses in streamlining their digital presence while still preserving a secure infrastructure. Furthermore, although the cyber security sector is not perceived as a winner-takes-all market, it is anticipated that platform vendors will emerge as leading contenders.

3. Attractive industry growth prospects and high earnings visibility

As organisations continue to adopt cloud computing and embrace remote working, the demand for effective cloud security solutions is increasing. As a leader in the industry, Palo Alto Networks is well-positioned to capitalise on this. The company has consistently outperformed the market, with a ten-year revenue compound annual growth rate (CAGR) of 32% (2013-2023), outpacing the industry average. Even more impressively, the company’s profitability as measured by free cash flow has increased at a compound annual rate of 40% over the same period.

Palo Alto Networks estimates its total addressable market (TAM) to be worth $110 billion growing at a 14% CAGR and projects $8 billion in annual revenues by 2024. The company expects 23% forward growth, blended across the original firewall business and the “next-gen security” business, comprised of Cortex and Prisma Cloud. The latter two products, at a $2 billion run rate and growing by 60% year-over-year (YoY), are key to landing a new generation of customers. As the macro environment forces companies to focus on total cost of ownership, Palo Alto’s product suite and geographic diversity will be two pillars of strength.


Figure 2: Palo Alto Network compound annual growth in sales and free cash flow (Bloomberg)


The company has pivoted towards a subscription-based business model, offering many of its products and services through flexible, recurring revenue streams. This shift has resulted in a higher proportion of recurring revenues, providing greater visibility and stability for investors. In the fiscal year 2022, recurring revenue accounted for 69% of the company’s total revenue, up from 61% in 2019. We see this trend continuing and becoming a key factor in increasing earnings visibility.

In Conclusion

In conclusion, we believe Palo Alto Networks stands as a compelling investment opportunity within the rapidly growing cyber security sector. As a market leader, the company is well-positioned to capitalise on the secular growth trend in cyber security, driven by the increasing digitalisation of businesses and the ever-evolving threat landscape. With a robust product portfolio and a strong track record of innovation, Palo Alto Networks continues to demonstrate a commitment to addressing emerging security challenges.