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Cybersecurity remains one of the hottest industries in the tech sector, with demand driven by the rising adoption of cloud-based services, internet of Things (IoT) devices, artificial intelligence (AI), and machine learning (ML) technologies, as well as the increasing frequency and sophistication of cyberattacks. According to a report by Grand View Research, the global cybersecurity market size is expected to reach $500.7 billion by 2030, expanding at a compound annual growth rate (CAGR) of 12.3% from 2023 to 2030.
Within the group, however, there's evidence of some short-term growing pains. Along with rising competition, cybersecurity companies are vulnerable to macroeconomic uncertainties - a factor cited late last week by Fortinet (FTNT) when it said an “unusually large volume of deals” were pushed back from closing in the June quarter. The news sent FTNT down sharply for its worst one-day drop on record, and multiple other cybersecurity stocks fell in sympathy.
However, the recent dip could create buying opportunities for investors looking to add exposure to select cybersecurity names.
One of the leading players in this space is Palo Alto Networks (PANW), which offers a comprehensive portfolio of security products and services that protect customers’ networks, clouds, and endpoints from cyberattacks. In terms of scale, Palo Alto Networks has a market cap of $65.8 billion, making it one of the largest cybersecurity companies in the world. Is now a good time to scoop up shares of this cybersecurity leader?
Analysis of Palo Alto Networks Stock’s Recent Performance
PANW reached an all-time high of $258.88 as recently as July 5, but the stock is now down 17.9% from that peak. Quite a bit of that pullback was triggered by Fortinet's warning late last week; just since last Thursday's close, Palo Alto shares have shed 10.5% of their value.
From a broader perspective, PANW is still up more than 52% on a year-to-date basis. That easily outperforms the S&P 500’s ($SPX) comparable return of 16.6%, as well as the returns of its key rivals - Fortinet is up 19.4% for the year, Cisco Systems (CSCO) has added 13.1%, and Check Point Software Technologies (CHKP) is clinging to a gain of 0.4%.
In terms of valuation, Palo Alto Networks has a trailing 12-month price-to-earnings ratio of 220.53 and a forward price-to-earnings ratio of 128.26, both of which are higher than the industry averages of 55.67 and 38.77, respectively. However, the stock also has a relatively higher expected earnings growth rate of 32.86% for the next five years, compared to the industry average of 19.77%.
Plus, PANW's price-to-sales ratio of 10.88 remains lower than some of its peers, such as CrowdStrike (CRWD) at 15.92, and Zscaler (ZS) at 14.13.
On balance, these metrics suggest that Palo Alto Networks is not necessarily overvalued, but arguably offers superior growth potential and market position.
Palo Alto Networks Ahead of Earnings
Ahead of its upcoming earnings report, expected on Friday, Aug. 18, the average estimate calls for Palo Alto Networks to report earnings of $0.54 per share, up 260% year over year, with revenue pegged at $1.19 billion, up 26% year over year.
While fiscal year 2023 earnings are expected to increase 469% to $1.44 per share, that growth rate is expected to moderate considerably in 2024, when earnings growth is projected at 28.5%.
Overall, the company enjoys a high level of support from analysts who cover the stock. Out of 37 analysts, 32 have a Strong Buy rating, 2 have a Buy rating, and 3 have a Hold rating for the stock.
The mean price target is $250.40, implying upside potential of 17.8% from current levels.
Should You Buy Palo Alto Networks Stock Now or Wait For a Better Opportunity?
Palo Alto Networks is a well-positioned cybersecurity leader that has been delivering a strong price performance in an industry that offers robust growth prospects. However, it's essential to acknowledge potential short-term headwinds, including potential macroeconomic pressures - like the ones that sent Fortinet spiraling recently.
Despite these challenges, Palo Alto Networks offers enticing long-term opportunities for investors seeking exposure to the flourishing cybersecurity space. Plus, it's worth considering that any macro headwinds the company is currently facing may now be sufficiently priced in following the widespread selling on Fortinet's warning.
Palo Alto Networks stock may face some volatility and challenges in the short term, but it also offers significant long-term potential for investors who are looking for exposure to the expanding cybersecurity industry. Therefore, now may be a good time to scoop up shares of this stock, or at the very least, keep it on your radar for a post-earnings pickup.
On the date of publication, Ebube Jones 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.
