/code%20on%20computer%20screen%20java%20html.jpg)
Shares of Palo Alto Networks (PANW) have created massive wealth for investors in the past decade, rising 1,345% since January 2014. That easily dwarfs the returns of the Nasdaq Composite ($NASX), which has gained 290% in this period.
Palo Alto Networks is part of the rapidly expanding cybersecurity industry. In the last few years, the exponential rise in the number of connected devices, the shift towards work from home, and the digital transformation of companies across industries have raised the demand for cybersecurity solutions.
The cybersecurity industry can be considered somewhat recession-resistant, as enterprises are unlikely to lower spending here, even amid periods of market downturns. It's essential to safeguard against cyber threats, enabling Palo Alto Networks and its peers to generate cash flows across market cycles.
So, let’s see if PANW stock can continue to outpace the broader markets in 2024 and beyond.
Strong Demand Boosts Results at Palo Alto Networks
Palo Alto Networks provides enterprise-facing cyber security solutions. Its platforms and services are backed by threat intelligence and automation, resulting in higher customer engagement and retention rates.
During its recent earnings call, the company warned against the severity and frequency of ransomware attacks, which should drive the demand for its products and solutions higher. According to Palo Alto Networks, there is a 37% increase in multi-extortion ransomware attacks, while the average ransomware payment is up 28%.
In fiscal Q1 of 2024 (ended in October), Palo Alto Networks grew sales by 20% year over year while billings were up 16%. Its RPO, or remaining performance obligations, increased by 26% to $10.4 billion, compared to total sales of $7.2 billion in the last four quarters. An asset-light model allowed PANW to expand operating margins by 760 basis points in Q1, ending the quarter with $1.5 billion of adjusted free cash flow.
Palo Alto Networks' next-generation security business currently rakes in annual recurring revenue of $3.23 billion, which suggests roughly 46% of its top line is tied to subscriptions, resulting in predictable cash flows.
Is Palo Alto Networks a Good Stock to Buy Right Now?
Analysts tracking PANW expect its sales to rise by 18.7% year-over-year to $8.2 billion in fiscal 2024, and by 18% to $9.66 billion in fiscal 2025. Comparatively, its adjusted earnings are forecast to rise by 22.5% over the next five years.
Priced at 11 times forward sales and 52x forward earnings, Palo Alto stock is quite expensive. Comparatively, the sector median forward price-to-earnings multiple is much lower at 23.5x.
As the valuation for Palo Alto Networks is lofty, it is unlikely for the stock to replicate its market-thumping gains in the upcoming decade. That said, the cybersecurity giant continues to expand profit margins at an enviable pace and commands a premium valuation.
What is the Target Price for PANW?
Investment firm Susquehanna is unbothered by PANW's stretched valuations, and recently initiated coverage on the stock with a “positive” rating and a Street-high price target of $400, citing the company's “category-leading positioning in network and cloud security.” That target implies expected upside of nearly 40%. In a note to clients, analyst Shyam Patil wrote, "We acknowledge the company is trading at a premium but see this as well-deserved given the premium nature of the asset.”
Most of Wall Street is also in the bullish camp for PANW, but with far less ambitious upside forecasts. Out of the 39 analysts covering the stock, 32 recommend “strong buy,” two recommend “moderate buy,” and five recommend “hold”. The average 12-month price target for PANW is $293.50, indicating an upside potential of only 2.5%.
