Palo Alto Networks (PANW -3.91%) has a ton going for it proper now. It enacted a 2-for-1 inventory cut up in December and lately notched a brand new all-time excessive after reporting robust Q2 FY 2025 (ending Jan. 31) outcomes.
The inventory has regarded borderline unstoppable over the previous yr, and if administration’s projections maintain true, this would possibly proceed all through 2025. Nevertheless, there is a little bit of a premium on the inventory, so is it a worth value paying?
One division in Palo Alto is displaying phenomenal progress
Palo Alto Networks is a cybersecurity firm that may finest be regarded as two companies.
Its next-generation enterprise is an extremely fashionable possibility. This synthetic intelligence (AI)-powered cybersecurity platform has a number of merchandise and can be utilized to guard community endpoints and cloud knowledge, and hunt for threats. It’s Palo Alto’s greatest progress case, however it competes with one other worthy cybersecurity competitor: CrowdStrike.
These two are competing in primarily the identical market: a companywide cybersecurity platform that simply scales, irrespective of what number of gadgets are on the community. Moreover, each corporations try to consolidate many cybersecurity features into one platform, a development Palo Alto calls “platformization.”
The expansion and potential for this division is so robust that Palo Alto chooses to separate it out from its general outcomes. In Q2, Subsequent-Era’s annual recurring income (ARR) rose 37% yr over yr to $4.8 billion. Whereas we do not have CrowdStrike’s This autumn FY 2025 outcomes (which embody the identical quarter as Palo Alto’s Q2), CrowdStrike’s ARR was $4 billion in Q3, rising 27% yr over yr. So, it is clear that Palo Alto’s comparative enterprise is rising quicker and is bigger than that of a key competitor, which exhibits how robust this enterprise section is for Palo Alto.
Its legacy enterprise, which largely consists of firewalls, is not doing practically as nicely. These prospects aren’t displaying a ton of progress, which is why Palo Alto’s general income solely rose 14% yr over yr to $2.3 billion. Nevertheless, this mature enterprise unit is probably going a considerable driver of earnings, boosting Palo Alto’s profitability.
PANW Working Margin (TTM) knowledge by YCharts
That is only the start of Palo Alto’s margins rising, as many software program corporations can obtain 30% working margins when optimized for profitability. Nevertheless, there may be nonetheless an enormous cybersecurity marketplace for Palo Alto to seize, so prioritizing market share first is sensible. But it surely’s one thing buyers should contemplate earlier than analyzing the inventory’s valuation.
The inventory carries a premium price ticket
As a result of Palo Alto is worthwhile, many buyers will robotically worth the inventory utilizing its price-to-earnings (P/E) ratio. Whereas I agree that is a sensible factor to do, the margin caveat I mentioned can be one thing that buyers should weigh.
Proper now, Palo Alto’s inventory trades for 64 instances ahead earnings, which is a really costly price ticket.
PANW PE Ratio (Ahead) knowledge by YCharts
Nevertheless, Palo Alto nonetheless has loads of room to develop its margins, so buyers should not get too wrapped up with this price ticket.
If we check out Palo Alto’s price-to-sales (P/S) ratio, it trades at 17 instances gross sales, which nonetheless is not all that low-cost for a software program firm. For reference, a totally mature software program firm like Adobe trades for 9.6 instances gross sales.
Nevertheless, Adobe is not all that far off from Palo Alto’s general progress price, particularly when administration is guiding for 14% income progress for FY 2025.
PANW Working Income (Quarterly YoY Progress) knowledge by YCharts
Is Palo Alto value it?
So, does Palo Alto deserve this premium? I might say it does, however it’s actually nearing the height of how a lot premium needs to be assigned to the inventory. There’s a number of progress baked into Palo Alto’s inventory worth, and buyers want to pay attention to that earlier than taking a place. But when it may possibly massively develop its margins and proceed rising its next-gen cybersecurity enterprise, Palo Alto’s inventory could possibly be a great one to personal shifting ahead.
Keithen Drury has positions in Adobe and CrowdStrike. The Motley Idiot has positions in and recommends Adobe and CrowdStrike. The Motley Idiot recommends Palo Alto Networks. The Motley Idiot has a disclosure coverage.
