Stock Analysis on Net
Stock Analysis on Net

Palo Alto Networks Inc. (NASDAQ:PANW)

Present Value of Free Cash Flow to Equity (FCFE)

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.

Intrinsic Stock Value (Valuation Summary)

Palo Alto Networks Inc., free cash flow to equity (FCFE) forecast

US$ in thousands, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 14.57%
01 FCFE0 939,200
1 FCFE1 708,754 = 939,200 × (1 + -24.54%) 618,599
2 FCFE2 602,145 = 708,754 × (1 + -15.04%) 458,701
3 FCFE3 568,743 = 602,145 × (1 + -5.55%) 378,146
4 FCFE4 591,195 = 568,743 × (1 + 3.95%) 343,074
5 FCFE5 670,666 = 591,195 × (1 + 13.44%) 339,686
5 Terminal value (TV5) 67,236,374 = 670,666 × (1 + 13.44%) ÷ (14.57% – 13.44%) 34,054,595
Intrinsic value of Palo Alto Networks Inc. common stock 36,192,801
 
Intrinsic value of Palo Alto Networks Inc. common stock (per share) $112.02
Current share price $291.42

Based on: 10-K (reporting date: 2023-07-31).

1 See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.86%
Expected rate of return on market portfolio2 E(RM) 13.52%
Systematic risk of Palo Alto Networks Inc. common stock βPANW 1.12
 
Required rate of return on Palo Alto Networks Inc. common stock3 rPANW 14.57%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rPANW = RF + βPANW [E(RM) – RF]
= 4.86% + 1.12 [13.52% – 4.86%]
= 14.57%

FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Palo Alto Networks Inc., PRAT model

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Average Jul 31, 2023 Jul 31, 2022 Jul 31, 2021 Jul 31, 2020 Jul 31, 2019 Jul 31, 2018
Selected Financial Data (US$ in thousands)
Net income (loss) 439,700 (267,000) (498,900) (267,000) (81,900) (147,900)
Revenue 6,892,700 5,501,500 4,256,100 3,408,400 2,899,600 2,273,100
Total assets 14,501,100 12,253,600 10,241,600 9,065,400 6,592,200 5,823,000
Stockholders’ equity 1,748,400 210,000 634,500 1,101,800 1,586,300 966,400
Financial Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00 1.00
Profit margin2 6.38% -4.85% -11.72% -7.83% -2.82% -6.51%
Asset turnover3 0.48 0.45 0.42 0.38 0.44 0.39
Financial leverage4 8.29 58.35 16.14 8.23 4.16 6.03
Averages
Retention rate 1.00
Profit margin -6.75%
Asset turnover 0.42
Financial leverage 8.57
 
FCFE growth rate (g)5 -24.54%

Based on: 10-K (reporting date: 2023-07-31), 10-K (reporting date: 2022-07-31), 10-K (reporting date: 2021-07-31), 10-K (reporting date: 2020-07-31), 10-K (reporting date: 2019-07-31), 10-K (reporting date: 2018-07-31).

2023 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income (loss) ÷ Revenue
= 100 × 439,700 ÷ 6,892,700
= 6.38%

3 Asset turnover = Revenue ÷ Total assets
= 6,892,700 ÷ 14,501,100
= 0.48

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 14,501,100 ÷ 1,748,400
= 8.29

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × -6.75% × 0.42 × 8.57
= -24.54%

FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (94,157,802 × 14.57% – 939,200) ÷ (94,157,802 + 939,200)
= 13.44%

where:
Equity market value0 = current market value of Palo Alto Networks Inc. common stock (US$ in thousands)
FCFE0 = the last year Palo Alto Networks Inc. free cash flow to equity (US$ in thousands)
r = required rate of return on Palo Alto Networks Inc. common stock

FCFE growth rate (g) forecast

Palo Alto Networks Inc., H-model

Microsoft Excel
Year Value gt
1 g1 -24.54%
2 g2 -15.04%
3 g3 -5.55%
4 g4 3.95%
5 and thereafter g5 13.44%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= -24.54% + (13.44% – -24.54%) × (2 – 1) ÷ (5 – 1)
= -15.04%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= -24.54% + (13.44% – -24.54%) × (3 – 1) ÷ (5 – 1)
= -5.55%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= -24.54% + (13.44% – -24.54%) × (4 – 1) ÷ (5 – 1)
= 3.95%