The cybersecurity sector is expected to see strong growth in the coming years due to seemingly endless cyber threats. Underscoring this, in his final days in office, former President Biden signed an executive order focused on improving U.S. cybersecurity, stating that “adversarial countries and criminals continue to conduct cyber campaigns targeting the United States and Americans.”
Given the current threat landscape, investing in cybersecurity companies makes sense. And the leader in the space by market cap is Palo Alto Networks (PANW -0.20%). The company executed a 2-for-1 stock split in December, making the price of its shares more affordable to a broader range of investors.
However, these factors alone aren’t a reason to invest in Palo Alto Networks. After all, its shares hit a 52-week high of $207.24 in December. Although the price has dropped a bit since then, it’s still well above the low of $130.04 reached last February. Here’s a deeper look at the cybersecurity company to assess whether its stock is a buy.
Palo Alto Networks’ business performance
Its leadership in the industry positions Palo Alto Networks to benefit from the growth in cybersecurity demand. In fact, CEO Nikesh Arora noted, “Despite the acceleration of technology spend due to AI, cybersecurity continues to outpace technology spend.”
To see cybersecurity demand outstripping the hot artificial intelligence (AI) field is surprising but understandable given high-profile cyber attacks, such as the Treasury Department’s hack in December. This demand has translated into strong results in Palo Alto Networks’ fiscal first quarter, ended Oct. 31. Q1 revenue was up a robust 14% year over year to $2.1 billion.
Palo Alto Networks also managed costs well, leading to a fiscal Q1 gross profit of $1.6 billion, up from $1.4 billion in 2023. This helped Q1 net income skyrocket to $350.7 million from $194.2 million in the prior year. Net income growth led to Q1 diluted earnings per share (EPS) of $0.99, an impressive increase from 2023’s $0.56.
Management expects its Q1 success to continue, forecasting that sales for its 2025 fiscal year will come in at around $9.1 billion. This represents 14% growth over fiscal 2024’s $8 billion.
Palo Alto Networks’ growth strategy
The strong results that Palo Alto Networks delivered in Q1 are not only due to the tailwind of rising cybersecurity demand. The company adopted a strategy called platformization. This involves getting customers to consolidate their security spending onto a single platform. Today, businesses are using over a dozen different cybersecurity tools from various vendors.
Palo Alto Networks outlined the platformization approach during its Q2 earnings call last February. This new strategy, by the way, led to its share price hitting a 52-week low at the time, as investors were concerned about the company’s long-term prospects.
Nearly a year later, the company’s platformization strategy has been vindicated and not just because of its strong Q1 results. Last year, IBM partnered with Palo Alto Networks to adopt the latter’s cybersecurity platform while also training an army of over 1,000 IBM consultants to sell Palo Alto Networks’ solutions.
Arora underscored the company’s strategy by stating that “the market will continue to converge toward a fewer set of platformization players over the next 5 to 10 years… Having started this trend, we intend to be one of those few players.”
Deciding whether to buy Palo Alto Networks stock
Palo Alto Networks operates in an industry with strong demand. Its revenue and EPS are rising. Its strategy for future growth is sound. All of these factors make Palo Alto a good stock to invest in. And it doesn’t end there.
The company exited Q1 with an amazing balance sheet. It held total assets of $20.4 billion compared to total liabilities of $14.5 billion, but that’s not all. Those liabilities included $11.1 billion in deferred revenue, which represents up-front payments from some customers that can be removed as a liability and recognized as revenue once services are rendered.
Now, the question is whether it is the right time to purchase Palo Alto’s stock. To get to an answer, here’s a look at the company’s forward price-to-earnings (P/E) ratio compared to some of its competition. This metric reveals how much investors are willing to pay for each dollar of projected earnings over the next 12 months and is useful in assessing stock valuation.
Data by YCharts.
Palo Alto Networks trades for 56 times forward earnings, which is lower than competitors, indicating its share price is a good value now. Considering it’s a well-run company seeing business success, and with shares at a reasonable valuation, now makes a good time to invest in Palo Alto Networks for the long term.
