Palo Alto Networks - A Play For The Future
Palo Alto Networks - A Play For The Future
The market got it wrong. This one is going TO THE MOON!
I woke up this morning to an article about Palo Alto’s new push towards a singular platform and their hopes of market capture, written by one of the top analysts in the business,
from newsletter. I very much respect Richard, his work, his analysis, and his experience. I even consider him a friend. However… he’s wrong!To summarize the news, Palo Alto Networks announced earnings earlier this week, topping industry analyst estimates with the results. However, they also put out lower guidance for the rest of 2024. The net result was about a 20% drop in the stock price after hours and the scrubbing off of around $20B in market cap the following day. In other words, the public market freaked the hell out.
The earnings report stated that the company was seeing spending fatigue and an increase in the need to tighten security budgets amidst businesses becoming more efficient with their spending. This makes TOTAL sense!
Cybersecurity buyers have been publicly saying that we have “too many solutions”, “too many vendors”, “too many alerts”, “too much investment”, and quite frankly too many shitty products that don’t provide value. I agree with them!
But for the sake of argument, let’s take a step back and consider the alternatives. Let’s assume that all of the complaints of the last few years are echo chamber garbage, and the reality is that buyers really want point solutions that provide siloed output that don’t work well together and haven’t been successful in securing the enterprise. If this is true, I can still make the case that Palo Alto’s platformization play (HAH, I love the new word) will win in the long term.
The Strategic Details
Nikesh Arora and the Palo team have spent the last half-decade acquiring the best of bread in many of the critical cybersecurity niche areas. Let’s take a look at Wikipedia to see the list of acquisitions since 2017. I added bolding to the ones that I felt were near the top of the market in their specific subsegment at the time of acquisition (your bolding may vary).
March 2017: LightCyber for approximately $100 million[34]
March 2018: Cloud Security company Evident.io for $300 million. This acquisition created the Prisma Cloud division.[35]
April 2018: Secdo[36]
October 2018: RedLock for $173 million[37]
February 2019: Demisto for $560 million[38]
May 2019: Twistlock for $410 million[39]
September 2019: Zingbox for $75 million[42]
November 2019: Aporeto, Inc. for $150 million[43][better source needed]
April 2020: CloudGenix, Inc. for $420 million[44]
August 2020: Crypsis Group for $265 million[45]
November 2020: Palo Alto Networks announced its intent to acquire Expanse for $800 million.[46]
February 2021: Bridgecrew for $156 million[47]
November 2022: Cider Security for $300 million.[48]
November 2023: Talon Cyber Security for $625 million[51]
December 2023: Dig Security for $400 million[52]
As you can see, they weren’t buying garbage technology. It’s not like the old days of an acquisition done by IBM or Symantec, where good companies go to wither and die. Palo targeted and acquired one of the top three companies in each security subsegment to broaden their offering. The promise all along has been an eventual platform that offers all of these technologies from a single vendor. If this is where the story ended, I’d agree with Richard that the results will go nowhere.. but this is just where the tale BEGINS!
The Era of Unified Data and AI Analysis
In the earnings guidance, Palo stated that it would offer programs and incentives (e.g., free months of service) to buyers who trade in legacy vendor products. They are willing to do no-cost deals, introductory offers, and free product upgrades to bring on and grow their customer base. At first glance, this sounds like a HORRIBLE idea - next year, let’s GIVE AWAY our products. That’s a super refreshing new way to do business!
So why would Palo choose this strategy? The public market immediately responded and told the executive team they had made a mistake. Hold on to your shorts because here comes the twist. They haven’t.
Palo plans to use this year to do some essential things to the business to set them up to win in the long game. They are playing chess while the rest of the cybersecurity market is playing checkers.
Pay down technical debt - Palo's historic acquisitions were largely left alone and only worked toward a broader integration play in the last few years. This built up technical debt, and in the next year, Palo will pay this debt down and build a much more robust engine and user experience. This costs money and will be a minor hit to their bottom line. They must invest in themselves and their innovation pipeline.
Collect and unify the largest cybersecurity dataset on the planet - Only a few cyber players have multiple SaaS cyber offerings and can collect such a massive data set. Palo plans to leverage this dataset and build a network effect by getting as many new customers onto the platform as quickly as possible. Each new customer is another set of raw data that their AI system learns from and can use to improve accuracy. This is an apparent reason to blitz the market and attempt to dominate as a single vendor offering. This is why they are giving products away for free.
“Activate their AI leadership strategy” - The marketing words are Palo’s, not mine. However, the strategy is a good one. There are two to three players in the global cyber market who might understand and take a shot at the broad AI cyber vision. Palo believes that their resources and current capabilities give them a headstart in the AI-backed cybersecurity detection and prevention of attacks arena. I am confident they are correct. There is nobody better fit to make these moves except for Microsoft and possibly Google (the leaders in AI today). Google doesn’t see the cybersecurity market as meaningful, and Microsoft has traditionally been unable to execute its long-term vision. Palo has the lead and will win over everyone else.
Start the afterburners and buy the market - There is a unified market forming in which a one-vendor platform provides outsized value compared to point solutions. Nobody would switch if the platform's value weren’t orders of magnitude better than point solutions - but it is, or at least will be! Every additional customer you put onto the platform makes the platform more robust for everyone else. The network effect is real, and when the network effect is real, you have to blitzscale (buy) the market. The first company to get there has a distinct advantage over the competition, making it challenging to dethrone them over time.
The new guidance Palo provided not only makes sense in the near term but will show a massive return on investment in the long term. They will spend 2024 reworking the spaceship with new boosters, nose cones, and steering systems. The only real question remains whether they can execute the engineering side of this vision because this is one market they will not be able to acquire their way into. This year will be a year of innovation and reinvestment in the company, shrinking its growth rate but resulting in a launching pad that will take the company to a whole new level of dominance.
I’m sorry
. I love ya, brother, but with all due respect, you’ve missed the boat on this one. The one ring to rule them cyber platform will be here in the next three years, and Palo Alto Networks will be the one to bring it to the world.Additional background reading from The Cyber Why on Palo Alto Networks and the cyber AI race is below:
Palo Alto's Big Hairy Audacious Goal
The Next Era of Cyber Security Companies
AI Will Be The Next New Massive Platform
The Margin Crush is Coming in 2024
Wow! PANW fan man in the house! :-)
I’m glad that you at least acknowledge the critical question: will they succeed in delivering the engineering work that remains ahead of them in order to deliver the innovative and truly integrated AI-driven cyber platform?
There’s no doubt it’s a great story. There’s also no doubt there’s a ton of work left ahead to bring it to real world fruition. In my humble opinion, it’s far from guaranteed that they will succeed -- but as a betting man, I generally agree with your assessment.