Investing Lesson from Palo Alto: Vision-Driven Stock

The disconnection between reality and expectation is one of our investing lessons from Palo Alto Network.

The stock price of Santa Clara-based company rises from 535 to an insane 3,554 from 2012 to 2020. During that period, only once did it record positive earning. What is investing lesson from Palo Alto Network (PANW)?

In This Issue

Firewall Against Bear
Investing Lesson from Palo Alto Network: Earning isn’t Everything.

In the 2020 Annual Letter, Warren Buffett says that one of his preferences for investing is: Company that generates a high rate of return. Palo Alto is the antithesis of that characteristic. It generates no return. Since 2012, The Security Network company recorded no positive earnings but still give remarkable capital gain for its shareholders. Its stock prices grew more than ten times from 2012 to 2021.

It is not new for us – the stock market is often disconnected from reality. Nevertheless, we keep trying to find out what is behind those irrational moves. We hope there is a lesson we can learn.

Exploring further on its financial report, The Santa Clara-based company has a nice revenue trend. It grows from just 49 million in 2010 to 3.4 Billion in 2020. Our question is, does this trend give a justification for its soaring stock price?

And FYI, this isn’t meme stock that rallies only a month then soaks all investor money. If you don’t pay attention, we remind you that this security developer are in the bull market since 2010. A time frame that could be classified as “long term”

Investor question

So, we just need to find a company with a good revenue trend and put the money there? The question is, is this strategy sustainable in all situations?

Interpreting Market
Expectation Matters, That’s One of Investing Lesson from Palo Alto Network

Our first hypothesis is the industry where Palo Alto operates. It is fancy tech that gets attraction today.

It is no longer secret that we live in the digital and internet era. Everyone talking about cloud and internet software – and any other fancy term like SaaS, PaaS. All sounds good and exciting. But, as old adage says: safety comes first. And therefore, Internet security become a mandatory conversation. It is not surprising, every data – every important one are on the cloud, beyond your control, beyond your on-site. It is flexible but at the same time, it is vulnerable. This is – maybe – the justification of the Palo Alto meteoric stock price. Because it is one of the leaders in this field.

And, based on our analysis, the security thing is not the only reason. Palo Alto offers opportunities more.

Security Transformation

Palo Alto Network (or PANW, to make our writing easier) begin its business as a next-generation firewall provider. For the reader who asks what the heck is a firewall? What is “the next generation”? We inform you that the firewall’s role is simply to isolate your data from harmful connections. The next generation means a firewall with more flexible features.

Example: You are a boss of a company, to make sure your employee productive during work hours, you can set a firewall to prevent them from accessing some certain connection – Pornhub for instance. This is a conventional firewall. The next-generation firewall offers more flexibility and control – also security. Because you are a good boss, you may set your employee could access Pornhub – but you disable the comment section. You just don’t want your employee to join the dirty talk. You also could limit the hours they connect.

Palo Alto provides a next-generation firewall under the product name: Strata.

It doesn’t stop there. Via acquisition, Palo Alto poise to become bigger and associated with cybersecurity.

A notable milestone is the creation of Prisma, the cloud-based security service. And Cortex, a threat detection system that exploits AI technology. From next-generation firewall only, Palo Alto transforms to become next-generation cybersecurity.

Now, this is a real justification for the insane bull market of PANW.

Lesson? Expectations and promises could give tremendous excuses for negative earning.

Excuse for Entrepreneur

We start to think that Tesla has a lot of similarities with PANW (or is it better to say that PANW has many similarities with Tesla?). Tesla’s wild bull run isn’t followed by a great financial performance in terms of earnings. But as PANW, the revenue offers a clue that the EV maker has a bright future.

Tesla experiences the same pattern as Palo Alto. Once again, it gives us insight that expectation could move the market - apart from poor reality. That is another investing lesson from Palo Alto Network.

Similarity With Palo Alto

As you have expected, like PANW that transform from a firewall provider to a cybersecurity platform, Tesla also has an ugly cyber truck to revolutionize the truck industry.

No, I’m kidding.

Tesla has transformed from an EV maker to an integrated energy company. It is now producing its own battery and self-driving system. In Tesla’s case, Investors believe in Musk’s vision and give many excuses for its poor financial performance.

The only difference is, Palo Alto side keeps acquiring another company to achieve its vision while the Elon side builds vertical integration along with the Giga factory to gain an advantage over competitors. But the result is the same, Wall Street loves them.

Extrapolating Pattern
Investing Lesson From Palo Alto: Sentiment Could Be That Long


So it seems that investors will give any excuse no matter bad its financial condition as long as there is a vision. Whether it is EV that makes our earth greener (really?) or cybersecurity that has a promising future. And it is true also for another vision-driven stock: Hail riding platform (Uber, Lyft), Telemedicine (Teladoc), whatever it is (Palantir, Snowflake). Even when the profit is elusive and the economic moat is questionable, the market will give enough excuse.

But, how long? We don’t know. It could be longer than anyone expected. As an old saying states, “it could be irrational longer than you stay solvent.”

Investor takeaway
Could We Pursue Company like Them? This is an Important Investing Lesson From Palo Alto.

Nothing wrong as long as a specific investing strategy makes money. We don’t need a value investing book and just throw all financial reports, we won’t read them. We just need to grasp entrepreneur vision and that’s all. Well, we don’t completely disagree. But there are several points we need to remind you:

  1. After subprime mortgage crises, we – the world – are in the FED labs and experience their experiment. How long this insane policy could withstand all the consequences, we don’t know. But one thing is for sure, this will not end at any cost.
  2. As a consequence of point 1, with massive money flooding the market and industry, it is not difficult to see the connection between the rapid growth in technology and the rapid growth of the money supply it.
  3. Investing is about the risk and having more and more logical backup gives us comfortable sleep at night. If vision-driven stock seems easy to pick and invest in, we prefer value-driven stock. That is a stock with growth, strong, durable economic moat, also, good management. Vision-driven investing may work now, ten years later – maybe. But it won’t last forever.