Stock Analysis on Net
Stock Analysis on Net

Palo Alto Networks Inc. (NASDAQ:PANW)

Present Value of Free Cash Flow to the Firm (FCFF)

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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)

Palo Alto Networks Inc., free cash flow to the firm (FCFF) forecast

US$ in thousands, except per share data

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 13.86%
01 FCFF0 2,646,875
1 FCFF1 2,518,121 = 2,646,875 × (1 + -4.86%) 2,211,539
2 FCFF2 2,494,886 = 2,518,121 × (1 + -0.92%) 1,924,362
3 FCFF3 2,570,208 = 2,494,886 × (1 + 3.02%) 1,741,094
4 FCFF4 2,749,113 = 2,570,208 × (1 + 6.96%) 1,635,553
5 FCFF5 3,048,834 = 2,749,113 × (1 + 10.90%) 1,593,029
5 Terminal value (TV5) 114,216,065 = 3,048,834 × (1 + 10.90%) ÷ (13.86% – 10.90%) 59,678,405
Intrinsic value of Palo Alto Networks Inc. capital 68,783,982
Less: Convertible Senior Notes (fair value) 5,000,000
Intrinsic value of Palo Alto Networks Inc. common stock 63,783,982
 
Intrinsic value of Palo Alto Networks Inc. common stock (per share) $197.41
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.

Weighted Average Cost of Capital (WACC)

Palo Alto Networks Inc., cost of capital

Microsoft Excel
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 94,157,802 0.95 14.57%
Convertible Senior Notes (fair value) 5,000,000 0.05 0.47% = 0.60% × (1 – 21.28%)

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

1 US$ in thousands

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 323,100,000 × $291.42
= $94,157,802,000.00

   Convertible Senior Notes (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (22.40% + 21.00% + 21.00% + 21.00% + 21.00% + 26.80%) ÷ 6
= 21.28%

WACC = 13.86%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Palo Alto Networks Inc., PRAT model

Microsoft Excel
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)
Interest expense 27,200 27,400 163,300 88,700 83,900 29,600
Net income (loss) 439,700 (267,000) (498,900) (267,000) (81,900) (147,900)
 
Effective income tax rate (EITR)1 22.40% 21.00% 21.00% 21.00% 21.00% 26.80%
 
Interest expense, after tax2 21,107 21,646 129,007 70,073 66,281 21,667
Interest expense (after tax) and dividends 21,107 21,646 129,007 70,073 66,281 21,667
 
EBIT(1 – EITR)3 460,807 (245,354) (369,893) (196,927) (15,619) (126,233)
 
Current portion of convertible senior notes, net 1,991,500 3,676,800 1,557,900 — — 550,400
Convertible senior notes, net, excluding current portion — — 1,668,100 3,084,100 1,430,000 1,369,700
Stockholders’ equity 1,748,400 210,000 634,500 1,101,800 1,586,300 966,400
Total capital 3,739,900 3,886,800 3,860,500 4,185,900 3,016,300 2,886,500
Financial Ratios
Retention rate (RR)4 0.95 — — — — —
Return on invested capital (ROIC)5 12.32% -6.31% -9.58% -4.70% -0.52% -4.37%
Averages
RR 0.95
ROIC -5.10%
 
FCFF growth rate (g)6 -4.86%

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).

1 See details »

2023 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 27,200 × (1 – 22.40%)
= 21,107

3 EBIT(1 – EITR) = Net income (loss) + Interest expense, after tax
= 439,700 + 21,107
= 460,807

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [460,807 – 21,107] ÷ 460,807
= 0.95

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 460,807 ÷ 3,739,900
= 12.32%

6 g = RR × ROIC
= 0.95 × -5.10%
= -4.86%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (99,157,802 × 13.86% – 2,646,875) ÷ (99,157,802 + 2,646,875)
= 10.90%

where:

Total capital, fair value0 = current fair value of Palo Alto Networks Inc. debt and equity (US$ in thousands)
FCFF0 = the last year Palo Alto Networks Inc. free cash flow to the firm (US$ in thousands)
WACC = weighted average cost of Palo Alto Networks Inc. capital

FCFF growth rate (g) forecast

Palo Alto Networks Inc., H-model

Microsoft Excel
Year Value gt
1 g1 -4.86%
2 g2 -0.92%
3 g3 3.02%
4 g4 6.96%
5 and thereafter g5 10.90%

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)
= -4.86% + (10.90% – -4.86%) × (2 – 1) ÷ (5 – 1)
= -0.92%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= -4.86% + (10.90% – -4.86%) × (3 – 1) ÷ (5 – 1)
= 3.02%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= -4.86% + (10.90% – -4.86%) × (4 – 1) ÷ (5 – 1)
= 6.96%