Palo Alto Completes PureSec Buyout, Boosts Prisma Strategy

Palo Alto Networks PANW recently concluded the acquisition of serverless security provider PureSec to better protect customers’ journey to multi-cloud environments and extend its Prisma cloud security strategy. The transaction was worth around $47 million in cash.

PureSec will be integrated into Palo Alto’s Prisma cloud security platform, enabling the latter to add end-to-end serverless application security to its capabilities.

Rationale Behind Prisma Strategy

Transition of workloads to the cloud has several concerns — the most important being security. In such an environment, complexities of using different security solutions are best avoided.

Customers are increasingly looking for comprehensive and end-to-end security solutions so that they are better able to focus on their business growth without worrying about the security gaps in the system.

Per Gartner, 50% of enterprises will unknowingly directly expose some of their IaaS storage services, network segments, applications or APIs to public by 2021, up from 25% in 2018. This projection reflects the dire need of strong multi-cloud security offerings, which will cover all the security gaps.

The Prisma platform brings all of Palo Alto’s cloud security solutions under one umbrella, easing customers’ journey to the cloud.

How Acquisitions are Impacting Palo Alto

Since 2017, Palo Alto has spent nearly $1 billion for buying several small companies, specializing in a particular aspect of security. In third-quarter fiscal 2019 earnings call, the company had announced its intention to buy PureSec and container security company TwistLock for about $457 million in total, to kickstart Prisma.

We note that continued acquisitions are taking a toll on operating margins by increasing expenses. In the last reported quarter, non-GAAP operating margin contracted 50 basis points to 20.9% due to net expenses of about $7 million associated with buyouts. This apart, the time and resources required to integrate the acquired assets into its business can also potentially affect profitability.

Nonetheless, management is optimistic about growth through acquisitions. The buyout of Redlock has raked it significant revenues, since it was completed last October 2018. RedLock, which forms the basis of Prisma public cloud, crossed $100 million billings run rate in the fiscal third quarter.

Moreover, the buyout of Demisto in March this year is expected to be profitable for Palo Alto. The company’s Cortex platform, which is based on Demisto’s capabilities, is already witnessing strong demand.

Palo Alto Networks, Inc. Revenue (TTM)

Palo Alto Networks, Inc. Revenue (TTM)

Palo Alto Networks, Inc. revenue-ttm | Palo Alto Networks, Inc. Quote

Competition & Competitive Edge

The Security market has immense prospects and thus, competition is also intensifying. Fortinet’s FTNT Security Fabric architecture, which is also a comprehensive suite of security solutions, is gaining serious traction. Strong global demand for Security Fabric offerings, led by digital transformation across most industries, is pushing it to expand the Security Fabric product suite.

Moreover, Cisco’s CSCO cloud security solutions are gaining significant momentum due to various efforts to boost business. Notably, in October last year, Cisco acquired Duo Security to enhance its cloud security portfolio.

However, Palo Alto’s belief that its addressable market will be worth $24 billion by 2020 compared with $19 billion in 2017 is encouraging it to move forward in the cybersecurity market. Its efforts are leading to consistent expansion of customer base and revenue growth.

Zacks Rank & A Stock to Consider

Palo Alto currently has a Zacks Rank #3 (Hold).

A better-ranked stock in the broader Computer and Technology sector is eGain Corporation EGAN, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for eGain is forecast at 30%.

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