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)
Weighted Average Cost of Capital (WACC)
FCFF Growth Rate (g)

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

US$ in thousands, except per share data

Year	Value	FCFF_t or Terminal value (TV_t)	Calculation	Present value at 14.62%
0¹	FCFF₀	3,105,224
1	FCFF₁	3,051,924	= 3,105,224 × (1 + -1.72%)	2,662,758
2	FCFF₂	3,103,675	= 3,051,924 × (1 + 1.70%)	2,362,612
3	FCFF₃	3,262,208	= 3,103,675 × (1 + 5.11%)	2,166,635
4	FCFF₄	3,540,150	= 3,262,208 × (1 + 8.52%)	2,051,416
5	FCFF₅	3,962,569	= 3,540,150 × (1 + 11.93%)	2,003,397
5	Terminal value (TV₅)	165,321,427	= 3,962,569 × (1 + 11.93%) ÷ (14.62% – 11.93%)	83,583,265
Intrinsic value of Palo Alto Networks Inc. capital				94,830,082
Less: Convertible Senior Notes (fair value)				3,200,000
Intrinsic value of Palo Alto Networks Inc. common stock				91,630,082

Intrinsic value of Palo Alto Networks Inc. common stock (per share)				$281.42
Current share price				$388.06

Based on: 10-K (reporting date: 2024-07-31).

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.

Palo Alto Networks Inc., cost of capital

	Value¹	Weight	Required rate of return²	Calculation
Equity (fair value)	126,352,336	0.98	14.97%
Convertible Senior Notes (fair value)	3,200,000	0.02	0.47%	= 0.60% × (1 – 21.00%)

Based on: 10-K (reporting date: 2024-07-31).

¹ US$ in thousands

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 325,600,000 × $388.06
= $126,352,336,000.00

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
= (21.00% + 22.40% + 21.00% + 21.00% + 21.00% + 21.00%) ÷ 6
= 21.00%

WACC = 14.62%

FCFF growth rate (g) implied by PRAT model

Palo Alto Networks Inc., PRAT model

	Average	Jul 31, 2024	Jul 31, 2023	Jul 31, 2022	Jul 31, 2021	Jul 31, 2020	Jul 31, 2019
Selected Financial Data (US$ in thousands)
Interest expense		8,300)	27,200)	27,400)	163,300)	88,700)	83,900)
Net income (loss)		2,577,600)	439,700)	(267,000)	(498,900)	(267,000)	(81,900)

Effective income tax rate (EITR)¹		21.00%	22.40%	21.00%	21.00%	21.00%	21.00%

Interest expense, after tax²		6,557)	21,107)	21,646)	129,007)	70,073)	66,281)
Interest expense (after tax) and dividends		6,557)	21,107)	21,646)	129,007)	70,073)	66,281)

EBIT(1 – EITR)³		2,584,157)	460,807)	(245,354)	(369,893)	(196,927)	(15,619)

Current portion of convertible senior notes, net		963,900)	1,991,500)	3,676,800)	1,557,900)	—)	—)
Convertible senior notes, net, excluding current portion		—)	—)	—)	1,668,100)	3,084,100)	1,430,000)
Stockholders’ equity		5,169,700)	1,748,400)	210,000)	634,500)	1,101,800)	1,586,300)
Total capital		6,133,600)	3,739,900)	3,886,800)	3,860,500)	4,185,900)	3,016,300)
Financial Ratios
Retention rate (RR)⁴		1.00	0.95	—	—	—	—
Return on invested capital (ROIC)⁵		42.13%	12.32%	-6.31%	-9.58%	-4.70%	-0.52%
Averages
RR	0.98
ROIC	-1.76%

FCFF growth rate (g)⁶	-1.72%

Based on: 10-K (reporting date: 2024-07-31), 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).

¹ See details »

2024 Calculations

² Interest expense, after tax = Interest expense × (1 – EITR)
= 8,300 × (1 – 21.00%)
= 6,557

³ EBIT(1 – EITR) = Net income (loss) + Interest expense, after tax
= 2,577,600 + 6,557
= 2,584,157

⁴ RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [2,584,157 – 6,557] ÷ 2,584,157
= 1.00

⁵ ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 2,584,157 ÷ 6,133,600
= 42.13%

⁶ g = RR × ROIC
= 0.98 × -1.76%
= -1.72%

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

g = 100 × (Total capital, fair value₀ × WACC – FCFF₀) ÷ (Total capital, fair value₀ + FCFF₀)
= 100 × (129,552,336 × 14.62% – 3,105,224) ÷ (129,552,336 + 3,105,224)
= 11.93%

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

Year	Value	g_t
1	g₁	-1.72%
2	g₂	1.70%
3	g₃	5.11%
4	g₄	8.52%
5 and thereafter	g₅	11.93%

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)
= -1.72% + (11.93% – -1.72%) × (2 – 1) ÷ (5 – 1)
= 1.70%

g₃ = g₁ + (g₅ – g₁) × (3 – 1) ÷ (5 – 1)
= -1.72% + (11.93% – -1.72%) × (3 – 1) ÷ (5 – 1)
= 5.11%

g₄ = g₁ + (g₅ – g₁) × (4 – 1) ÷ (5 – 1)
= -1.72% + (11.93% – -1.72%) × (4 – 1) ÷ (5 – 1)
= 8.52%

Palo Alto Networks Inc. (NASDAQ:PANW)

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

Intrinsic Stock Value (Valuation Summary)

Weighted Average Cost of Capital (WACC)

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

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

FCFF growth rate (g) forecast