Palo Alto Networks, Inc.PANWNASDAQ

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DCF Valuation

DCF Valuation Summary

Strong Buy

Fair Value: $237.95 per share(market-calibrated)

+52.4%

Upside to Fair Value

Current

$156.09

Pure Model

$248.11

Fair Value

$237.95

Bull Case

$355.39

Bear Case

$171.62

Market Reality Check

Model Terminal Growth

3.75%

Market-Implied Growth

1.89%

Calibrated Growth

3.10%

Fair value uses 65% model / 35% market-implied terminal growth. Pure model: $248.11.

What's Driving This Ratingfor PANW

✓

CapEx already efficient

CapEx at 1.86% of revenue is already at or below sector maintenance level. No normalization needed — cash conversion is already strong.

✓

Premium margins already priced in

EBIT margin of 41.31% is already well above sector average. The model holds this level — there's limited room for margin expansion to drive upside. Valuation depends primarily on revenue growth.

↑

Strong near-term revenue growth

Analyst consensus projects 21.82% revenue growth in Year 1, fading to 12.08% by Year 5 and 3.75% by Year 10. Revenue reaches $26.7B by Year 10 (vs $9.2B today).

↔

Perpetuity and exit methods disagree

Perpetuity growth gives $202.44/share (25.1x terminal FCF) while exit multiple gives $293.79/share (41.1x terminal FCF). The 28x EV/EBITDA exit reflects current market multiples, while the perpetuity method with 3.75% growth is more conservative. The base case averages both methods.

🎯

Market pricing in lower growth than model

The market implies only 1.89% perpetual growth — 186bps below the model's 3.75%. This suggests the market sees headwinds or risks not in the model.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 68.12% indicates efficient cash generation. FCF reaches $8.1B by Year 10 (30.29% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)0.75

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)7.88%

Cost of Debt

Pre-tax Cost of Debt13.55%

Tax Rate28.94%

After-tax Cost of Debt9.63%

Equity Weight (E/V)99.67%

Debt Weight (D/V)0.33%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (99.67% × 7.88%) + (0.33% × 9.63%)

= 7.88%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$11.2B	$15.3B	$19.0B	$22.8B	$26.7B
EBIT	$4.6B	$6.3B	$7.8B	$9.4B	$11.0B
Tax	$1.3B	$1.8B	$2.3B	$2.7B	$3.2B
NOPAT	$3.3B	$4.5B	$5.6B	$6.7B	$7.8B
+ Depreciation	$355M	$483M	$599M	$719M	$842M
- Capex	$209M	$285M	$353M	$424M	$497M
- Δ NWC	$201M	$186M	$204M	$183M	$96M
Free Cash Flow	$3.2B	$4.5B	$5.6B	$6.8B	$8.1B
Discount Factor	0.927	0.796	0.684	0.588	0.468
Present Value	$3.0B	$3.6B	$3.8B	$4.0B	$3.8B

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$8.1B

Terminal Growth Rate3.75%

WACC7.88%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$203.0B

PV of Terminal Value$95.1B

Exit Multiple Method

Year 10 EBITDA$11.9B

Exit Multiple (EV/EBITDA)28.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$332.2B

PV of Terminal Value$155.6B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$37.1B

PV of Terminal Value$95.1B

Enterprise Value$132.2B

(-) Net Debt-$1.9B

Equity Value$134.1B

Shares Outstanding663M

Price per Share$202.44

Exit Multiple Method

PV of Projected FCFs$37.1B

PV of Terminal Value$155.6B

Enterprise Value$192.7B

(-) Net Debt-$1.9B

Equity Value$194.6B

Shares Outstanding663M

Price per Share$293.79

Pure Model Fair Value

$248.11

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	2.75%	3.25%	3.75%	4.25%	4.75%
5.88%	$319.95	$342.09	$374.61	$374.20	$359.13
6.88%	$268.88	$280.06	$294.80	$315.14	$345.03
7.88%	$233.57	$240.06	$248.11	$258.39	$271.94
8.88%	$206.83	$210.94	$215.84	$221.81	$229.22
9.88%	$185.43	$188.19	$191.40	$195.19	$199.71

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$171.62

10.0% vs current

• -25% vs analyst consensus
• Terminal growth: 3.3%
• Beta: 0.94

Base Case

$248.11

59.0% vs current

• Analyst consensus
• Terminal growth: 3.8%
• Beta: 0.75

Bull Case

$355.39

127.7% vs current

• +25% vs analyst consensus
• Terminal growth: 4.3%
• Beta: 0.64

Key Assumptions & Drivers✓ Using Analyst Consensus Estimates• Technology Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth21.82%

Year 3 Revenue Growth13.84%

Year 5 Revenue Growth12.08%

Year 7 Revenue Growth8.75%

Year 10 Revenue Growth3.75%

Terminal Growth Rate3.75%

Margin & Efficiency

Current EBIT Margin41.31%

Tax Rate28.94%

Historical Capex / Rev1.86%

NWC / Revenue10.00%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 28x EV/EBITDA (Technology sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

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