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Palo Alto to Fortify Security Offerings With CloudGenix Buyout

Zacks Equity Research

Palo Alto Networks PANW recently announced its agreement to acquire software-defined wide area network (SD-WAN) provider — CloudGenix — for approximately $420 million. Founded in 2013, CloudGenix helps its clients manage and secure network traffic at branches or distributed locations.

Rationale Behind CloudGenix Acquisition

Palo Alto Networks’latest acquisition is well timed amid the coronavirus-led global lockdown which has spurred the necessity of remote working. Due to the global quarantine situation, organizations are moving to cloud so that their employees can work from home uninterruptedly.

However, transition of workloads to the cloud has several concerns — the most important being security. In the current environment, where a massive global workforce is forced to work remotely, the security risk multiplies several times.

Here, with CloudGenix solution, organizations would be shielded from security threats caused by traffic entering their servers from multiple unknown devices.

Palo Alto Networks, Inc. Price and Consensus

Palo Alto Networks, Inc. Price and Consensus

Palo Alto Networks, Inc. price-consensus-chart | Palo Alto Networks, Inc. Quote

Palo Alto Networks, which offers network security solutions to enterprises, service providers and government entities worldwide, aims at bolstering its cloud-security offerings with the acquisition, which is expected to be completed during the company’s fiscal fourth quarter. CloudGenix will help Palo Alto Networks expand its market share in the SD-WAN space where Cisco CSCO currently leads.

CloudGenix will be integrated into Palo Alto’s PrismaAccess cloud security platform, enabling the latter to add end-to-end serverless application security to its capabilities.

Acquisitions Augur Well for Palo Alto Networks

Palo Alto Networks’ strategy of making acquisitions to boost growth is long documented. Since 2017, the firm has spent nearly $2 billion for buying several small companies, specializing in a particular aspect of security. Last year, the company acquired five companies, including Demisto and Twistlock.

These buyouts have helped the company expand its product portfolio and customer base, thereby bringing incremental revenues. Notably, the company has registered stellar double-digit revenue growth in trailing five years.

Nonetheless, we note that continued acquisitions are straining operating margins by escalating expenses. In the last reported quarter, non-GAAP operating margin shrunk 670 basis points to 17.9% due to net expenses of about $79 million associated with buyouts. Apart from this, the time and resources required to integrate the acquired assets into its business can potentially erode profitability.

Nevertheless, to remain competitive, companies in the security space had to acquire businesses to enhance their capabilities. Palo Alto Networks’ close competitor Cisco has acquired seven companies, including the $2.6-billion buyout of Acacia.

Fortinet FTNT bought two companies – CyberSponse and enSilo – for an undisclosed amount. Another competitor, FireEye FEYE, recently acquired a cloud security company — Cloudvisory — for an undisclosed amount. Moreover, the company purchased Verodin last May in a cash-and-stock deal worth approximately $250 million.

Palo Alto Networks currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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