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Companies in the cybersecurity industry have delivered market-thumping gains to shareholders over the past decade. The industry has enjoyed multiple secular tailwinds, such as the exponential rise of connected devices and the work-from-home trend, which has resulted in strong demand for device and data protection solutions amid a steep rise in online attacks.
One outperforming cybersecurity stock is Palo Alto Networks (PANW), which has returned 950% in the last 10 years. Valued at a market cap of $111.2 billion, Palo Alto Networks went public in July 2012, and has since returned a monstrous 1,840% to shareholders.
With PANW down 10.5% from February's all-time highs around $380, let’s see if this tech stock should be a part of your equity portfolio in 2024.
Is Palo Alto Networks Stock a Good Buy?
Palo Alto Networks (PANW) provides cybersecurity solutions globally. It offers firewall appliances and software called Panorama that is deployed on a customer’s network in public or private cloud environments. It also provides subscription services in verticals such as threat prevention, malware, laptop and mobile device protection, SaaS security, threat intelligence, and data loss prevention.
A widening portfolio of solutions and an expanding customer base have allowed Palo Alto Networks to increase its sales from $3.41 billion in fiscal 2020 to $8.02 billion in fiscal 2024 (which ended in July). In the last 12 months, the company has increased its revenue by 16.5% year over year, compared to the 25.3% growth in the year-ago period.
In early 2024, Palo Alto Networks reported that it saw a 10-fold increase in email-based phishing attacks year over year, as hackers leverage artificial intelligence (AI) capabilities to craft realistic-looking emails and gain access to sensitive information. To combat these attacks, PANW is integrating AI into several products, automating the cybersecurity process, and securing device and customer data.
Palo Alto Networks is now focused on the “platformization” of customers, which means it aims to become a one-stop solution across the cybersecurity value chain. In fiscal Q4 of 2024, Palo Alto’s annual recurring revenue (ARR) tied to its NGS (next-generation security) customers rose by 43% to $4.2 billion. These customers have now moved most of their cybersecurity requirements to the Palo Alto Networks platform.
PANW management believes it can end 2030 with NGS revenue of $15 billion, as it expects more than 3,500 enterprise customers to shift to its NGS stack over time.
Is PANW Stock Overvalued?
In Q4 of fiscal 2024, Palo Alto Networks reported revenue of $2.19 billion and adjusted earnings per share of $1.51. While sales rose by 12%, adjusted earnings expanded by just 5% year over year.
Analysts now expect sales to rise by 13.7% to $9.13 billion, while adjusted earnings are forecast at $6.27 per share in fiscal 2025, compared to $5.67 per share in 2024. So, priced at 12.2x forward sales and 55x forward earnings, PANW stock trades at a premium.
However, Palo Alto Networks is generating enough cash flow to support its business operations, target accretive acquisitions, service its interest payments, and lower its balance sheet debt. The company has already reduced its long-term debt from $3 billion in fiscal 2020 to $1.66 billion in fiscal 2021, and is currently debt-free. Moreover, its free cash flow has risen from $821 million in 2020 to $3.1 billion in 2024. So, it trades at 35.8x trailing free cash flow, which is not that expensive.
Out of the 45 analysts covering PANW stock, 31 recommend “strong buy,” two recommend “moderate buy,” and 12 recommend “hold,” for a “strong buy” consensus rating.
The average 12-month target price for PANW stock is $378.44, indicating an upside potential of 11.2% from current levels.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
