Is Palo Alto Networks Inventory a Purchase Now?

Palo Alto Networks (PANW -1.23%), one of many world’s largest cybersecurity firms, has been an important long-term inventory for progress traders. In the event you had invested $1,000 in its IPO in 2012, your stake could be value about $26,500 at this time.

Nevertheless, Palo Alto’s inventory set a file excessive of $202.95 in early December and nonetheless trades lower than 10% beneath that stage. Ought to traders purchase it at this time and anticipate even larger beneficial properties, or ought to they anticipate a pullback to start out a brand new place?

Picture supply: Getty Pictures.

How briskly has Palo Alto Networks been rising?

From fiscal 2014 to fiscal 2024, the latter of which resulted in July 2024, Palo Alto’s income grew at a compound annual progress fee of 30%. Most of its early progress got here from Strata, which homes its next-gen firewalls and on-site community safety instruments. However in recent times, its progress was primarily pushed by its two next-gen safety (NGS) ecosystems: Prisma for its cloud-based companies, and Cortex for its AI-powered menace detection instruments.

At this time, Palo Alto primarily measures its progress with three core metrics: its progress in remaining efficiency obligations (RPO, or the contractual obligations in its present contracts that have not been acknowledged as income but), the annual recurring income (ARR) progress of its NGS ecosystems, and its whole income progress.

Knowledge supply: Palo Alto Networks. YOY = 12 months over yr.

Palo Alto’s RPO and NGS ARR progress decelerated over the previous yr because the macro headwinds made it tougher to land large contracts and cross-sell extra companies, however its income progress accelerated barely within the first quarter of fiscal 2025.

For the second quarter, it expects its RPO to develop 20%-21% yr over yr, its NGS ARR to rise 35%-36%, and its whole income to extend 12%-14%. For the total yr, it expects its RPO to develop 19%-20%, its NGS ARR to rise 31%-32%, and its whole income to climb 14% to a variety of $9.12 billion to $9.17 billion.

Throughout its newest convention name, CEO Nikesh Arora mentioned AI was the “largest sign” for its near-term progress, with the rise of sooner and extra refined AI-driven assaults sparking an “improved safety posture and improved larger spend from CIOs.”

How worthwhile is Palo Alto Networks?

Palo Alto turned worthwhile on the premise of typically accepted accounting rules (GAAP) in fiscal 2023, and its GAAP internet revenue rose practically sixfold in fiscal 2024. It reached that milestone by chopping prices and reining in its stock-based compensation. That achievement silenced the bears who claimed it will by no means break even.

Nevertheless, the corporate nonetheless usually reviews its margin and EPS on an adjusted (non-GAAP) foundation, which filters out the short-term noise. Over the previous yr, its adjusted gross margin dipped barely because it expanded its “platformization” technique with loss-leading trials, promotions, and deferred income offers for newer cloud-based companies. It expects that technique to attract clients away from smaller and fewer diversified cybersecurity firms.

Knowledge supply: Palo Alto Networks.

But Palo Alto’s adjusted working margin continued to increase yr over yr because it streamlined its spending to offset that near-term stress on its gross margin. For the second quarter of fiscal 2025, it expects its adjusted EPS to develop 5%-6%.

For the total yr, it expects its adjusted working margin to rise 20-70 foundation factors yr over yr to a variety of 27.5%-28% as its adjusted EPS will increase 10%-13%. At $186, Palo Alto’s inventory does not look low-cost at 59 occasions the midpoint of that forecast. Its slower-growing rival, Fortinet, trades at simply 39 occasions its ahead adjusted earnings.

But Palo Alto nonetheless trades at a reduction to higher-growth cloud-native cybersecurity leaders equivalent to CrowdStrike and Zscaler, which commerce at 82 and 65 occasions ahead earnings, respectively.

Is it the suitable time to purchase Palo Alto’s inventory?

Palo Alto Networks’ inventory has traded at larger valuations ever since its market debut, but it surely’s justified that premium with its scale, diversification, and sturdy progress charges. Its excessive a number of may restrict its near-term beneficial properties, however traders who plan to carry the inventory for a minimum of a number of extra years ought to contemplate shopping for it at this time.