Corporate bureaucracies unwittingly create fairy tale investments.
So IBM handed over the MS-DOS golden goose to a Seattle software startup called Microsoft, who then engineered a revolution in Silicon Valley with its winter client-server model. Something similar, I believe, happened in 2004 when Cisco’s top suits decided to discontinue the Apollo Project, an Internet network security business. Terrible idea, Mr Chambers. Ciscosaurus unwittingly midwife the birth of Palo Alto Networks, a Valley IPO that will create history on Nasdaq on July 19 and transform the economics/technology paradigms of the $10 billion corporate Internet firewall market.
I expect the IPO to rise 40-50 per cent in its first trading hour. Cisco’s decision to cut Apollo is stunning because it exited network security at the precise moment the world entered the social media revolution, with its potential global market for private and corporate data protection Mark my words. Palo Alto networks will be the hottest Silicon Valley IPO of 2012 and eclipse the Facebook IPO debacle in May. That much, at least, is certain (to me!).
Palo Alto Networks provides next generation firewalls for corporate VPN and internet applications that enable IT security teams to monitor/manage flows of data across their networks. The beauty of Palo Alto Networks is that its growth potential is directly correlated to the exponential growth in data traffic in Skype, Facebook, Twitter, YouTube, Gmail and social networking, online gaming and video communication sites. The Palo Alto Networks data traffic monitor products simply outclass firewalls offerings of Juniper and Check Point, let alone poor Cisco. Ironically, Nir Zuk, the Bill Gates of network security was once Juniper’s chief network technologist until he quit his job in frustration and got venture funding from Sequoia capital to seed Palo Alto’s Networks. This former computer virus specialist is now a Valley legend to the cognoscenti.
The startup has grown to dominate the explosive growth global market for enterprise network firewalls in a mere four years with its suite of innovative, revolutionary software products. Network firewalls, intruder detection systems VPN security are at least a $10 billion market with a 20 per cent secular growth rate and Palo Alto Networks will dominate its niche in the global software village. After all, salesforce.com (CRM) rose 800 per cent after its IPO in a flat stock market. Investment fairy tales do happen. Any bank that does not allow its private clients to sell short is not in the investment business.
Palo Alto Networks valuation will easily top $2 billion when the IPO breaks syndicate on Nasdaq despite its exotic, niche technological edge. I love its recurrent revenue model and corporate/enterprise focuses, though a patent lawsuit filed by Juniper is a clear Achilles heel for the shares.
I hear huge VC/hedge fund/Russian oligarch interest in the shares, which will be priced at the top of its range 36-37. While Palo Alto generated 164 million in revenues in 2011, it is not profitable (lost $12.5 million in 2011). Will the disaster in the Facebook IPO (I warned my readers not to buy the Facebook IPO in an April column) hit Palo Alto? No, though I believe a valuation above $2 billion is a bit steep for a company with a mere $164 million in revenue, even if its growth rate could be 80 per cent for the next three years. The enterprise installed base is a mere 5300 now. The $230 million deal is a small and the narrow float (MS, Goldman and Citi are the underwriters) means a fabulous first day pop. The volatility in PANW will be huge, so widows, orphans, meek and gentle must avoid the IPO like the plague!, Oklahoma city’s other great natural gas colossus besides the disgraced Empire of Aubrey.