Palo Alto Networks, Inc NASDAQ PANW Shares Intrinsic Value Estimate

Palo Alto Networks' fair value is 18% higher than its analyst price target, suggesting it may be undervalued. Check out the analysis!

Palo Alto Networks, Inc. (NASDAQ:PANW) is currently trading at a price that is 18% lower than our fair value estimate. This prompts the question of whether the current share price accurately reflects the true value of the company. To answer this, we will use the Discounted Cash Flow (DCF) model to estimate the intrinsic value of the stock. The DCF model involves projecting the company's future cash flows and discounting them to present value. While this may sound complex, it is actually a straightforward process.

The DCF model is based on the idea that a dollar in the future is worth less than a dollar today. Therefore, we need to discount the future cash flows to arrive at a present value estimate. Our analysis uses a 2-stage model, which involves estimating the next ten years of cash flows, with a higher growth rate in the first stage and a lower growth rate in the second stage. We also calculate the Terminal Value, which accounts for all future cash flows beyond the initial ten-year period. This is done using the Gordon Growth formula and a discount rate based on the cost of equity.

The total equity value derived from the DCF model is US$128 billion, which, when divided by the total number of shares outstanding, gives an intrinsic value per share. Relative to the current share price of US$303, the company appears to be undervalued at a 23% discount. However, it's important to note that valuations are imprecise and can be influenced by various factors. For example, a slight adjustment to the terminal value growth rate can significantly impact the overall result.

While the DCF model is a useful tool for testing assumptions and theories, it does have limitations. It does not consider the cyclicality of an industry or a company's future capital requirements, and it is sensitive to changes in inputs such as the discount rate and cash flows. Therefore, it should be used in conjunction with other factors when assessing a company. In the case of Palo Alto Networks, there are additional elements that should be examined to fully understand why the company is trading at a discount to its intrinsic value.

In conclusion, the DCF model provides a valuable framework for estimating the intrinsic value of a company's stock. However, it is not a perfect valuation tool and should be used in conjunction with other methods and factors. The Simply Wall St app conducts DCF valuations for stocks on a daily basis, providing a useful resource for investors seeking to understand the true value of a company's stock.