• Sharebar

See Part 1 & 2 here

Insiders have sold the equivalent of 1x ttm revenues only four months after ipo. A secondary offering this past month (with no money flowing to the company itself) so close to ipo implies, "why the desperation?" PANW has allowed insiders to circumvent the original lockup restrictions in place only 4 months before.

Date Insider Shares Transaction Value*
TBA, filed 10/17/2012 Many sellers 4,800,000 Current price is 52 $ 249,600,000
10/22/2012 BONVANIE RENE- Officer 37,500 Sale at $60.48 per share. $ 2,268,000
10/22/2012 BATRA RAJIV- Officer 185,500 Sale at $60.48 per share. $ 11,219,040
10/22/2012 LANFRI WILLIAM A- Director 30,000 Sale at $60.48 per share. $ 1,814,400
10/22/2012 MCLAUGHLIN MARK D- Officer 46,000 Option Exercise at $10.77. $ 495,420
10/22/2012 MCLAUGHLIN MARK D- Officer 46,000 Sale at $60.48 per share. $ 2,782,080
10/22/2012 ZUK NIR- Officer 200,000 Sale at $60.48 per share. $ 12,096,000
7/24/2012 BATRA RAJIV- Officer 202,000 Sale at $39.06 per share. $ 7,890,120
7/24/2012 ZUK NIR- Officer 350,000 Sale at $39.06 per share. $ 13,671,000
Total $ 301,836,060

More generally, secondary offerings close to ipo have been a reliable predictor of future price declines . Examples with 30%+ declines from sale price include Bazaarvoice Inc (BV), Zynga, Inc. (ZNGA). The rationale is that unlike planned insider selling, insider selling that breaks lockup restrictions is a purposeful act - companies have to ask underwriters to sell renegotiate the earlier restrictions.

Final valuation
Trading at over 4,000 times ttm earnings, comparing earnings is not very meaningful because of the high stock compensation/expense. That by itself is very telling, echoing the stock expense issues of the dot-com era. Valuations make more sense on a revenue basis, on which PANW is still the most richly-valued at over 14x ttm price to revenues.

Comparable Companies Analysis
("Comps")
*Averages are unweighted
*As of 11/23/2012
Market Cap ($bil)
($bil)
($bil)
($bil)
($bil)
Equity
Enterprise
Revenue
Revenue
Revenue
Companies
Price ($)
MCAP
Value1
2011 (A)
2012 (E)
2013 (E)
CHKP
46.01
9.38
7.93
1.25
1.35
1.45
FTNT
19.06
3.05
2.67
0.44
0.53
0.62
FIRE
47.15
1.42
1.25
0.17
0.22
0.26
Average
4.62
3.95
0.62
0.70
0.78
PANW
55.41
3.79
3.47
0.12
0.23
0.39
         Enterprise
Value /
       Consensus
       Revenue
Multiples (x)
   
Estimated EPS ($)
Companies
2011 (A)
2012 (E)
2013 (E)
2012 (E)
2013 (E)
CHKP
6.36
5.87
5.47
3.17
3.48
FTNT
6.02
5.07
4.31
0.51
0.61
FIRE
7.55
5.71
4.74
0.81
1.00
Average
6.64
5.55
4.84
1.50
1.70
PANW
29.26
15.41
9.01
#N/A
#N/A

(above data), PANW is July vs Dec of other years

PANW is priced at 9x 2013 ttm revenues, a 100% premium to all its competitors (9.01/4.84). The difference is even more absurd when looking at earnings (which is not even meaningful). I believe this premium is unjustified given the questions about PANW's ability to replace CHKP products and renew revenue.

Risks
-Acquisition by CHKP or other competitor (~20-30% from current levels)
-Acceleration of growth and monetization as PANW takes market share from CHKP.

Implementation
-This is a highly volatile stock, and can easily move 20-30% to the upside before the thesis holds, and given the correction in the broader stock market, now is a time when PANW is highly vulnerable to upward bursts (e.g. PANW two Fridays again).

Conclusion
While the picture remains incomplete, I believe there is a compelling case to be short to the 20-25$ range. This is conservative, and only assumes the market revalues the EV/Revenue premium vs. its competitors.

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