When Nikesh Arora took over as chief executive of Palo Alto Networks in early June of 2018, his message to Wall Street was clear: He was going to remake the cybersecurity firm into a broad platform solutions provider via cloud computing services. Palo Alto stock has climbed some 440% since Arora became CEO, amid a well-executed acquisition spree that helped transform the company.
But, it hasn't always been a smooth ride. Palo Alto stock has sold off at times amid quarterly earnings surprises and strategic shifts.
Upon Arora's arrival, Palo Alto Networks garnered most of its revenue from network firewall appliances installed at customer locations. With over 19 acquisitions for over $4 billion since 2018, Arora expanded into new cybersecurity markets, including security operations center management. Along the way, he picked up a few artificial intelligence cybersecurity startups.
Palo Alto Stock: $100 Billion Market Cap
In 2023, Palo Alto stock climbed above a $100 billion market cap, the first cybersecurity firm to do so.
In 2024, the company unveiled a new marketing strategy leveraging its platform capabilities to drive growth in next-generation annual recurring revenue, a key financial metric. By fiscal 2030, Palo Alto aims to reach $15 billion in annual ARR, up from $4.2 billion in the just-ended fiscal year.
Still, some rivals downplay Palo Alto's transformation under Arora, calling the cybersecurity company an integrator, not an innovator. In a wide-ranging interview, Arora talked about his strategy to build the industry's biggest platform provider.
"We feel very comfortable that we have the organic capability to keep innovating," Arora told Investor's Business Daily.
"Over the last six years, 75% of our product launches have been organic and 25% have been acquisitions. When I came to Palo Alto, we were really good in our firewall technology but we had technical debt. We had not done innovation in new categories where we had to play. We had to build our capability and our muscle to play in more swim lanes."
Palo Alto Stock: Innovator Or Integrator?
Arora added: "So I said we need to have the humility to believe that somebody else can do a better job in a certain category. So we bought companies. Our acquisitions were product acquisitions, not really revenue. And, I will say this: I've been in the technology industry 30 years and we have one of the better track records on buying companies, integrating them and making them productive and useful to our product portfolio."
When he joined Palo Alto Networks, Arora was a newcomer to the cybersecurity industry, though a tech industry veteran.
Further, Arora served as chief operating officer of Masayoshi Son's Japan-based SoftBank from 2014 to 2016. Earlier, he rose to senior vice president and chief business officer of Google, where he helped build the dominant internet search business.
In the network firewall market, Palo Alto competes with Fortinet, Cisco Systems, Check Point Software Technologies and others. Firewall appliances protect computer networks by inspecting data traffic and blocking online intrusions.
Palo Alto Acquisition Spree
William Blair analyst Jonathan Ho says Palo Alto has moved faster under Arora than network firewall rivals.
"When Nikesh joined Palo Alto Networks, he saw the trends towards cloud and software in the market and realized Palo Alto had to evolve as a company," Ho told IBD. "Part of that involved M&A and betting on acquisitions of market-leading startup companies to leapfrog ahead and to gain access to new talent. I think the company has been tremendously successful in this effort, but challenges do remain in integrating the solution into one platform and showing that Palo Alto can innovate on its own."
Ho added: "At the same time, while not every acquisition worked out, I think they were necessary as Palo Alto could not internally catch up and develop the new products in so many new areas. So Nikesh, I think, has put the company in a strong position as the market consolidates to larger players and Palo Alto has a broad solution platform."
Taking On CrowdStrike, Zscaler
With acquisitions, Palo Alto moved into endpoint protection, taking on CrowdStrike. Endpoint security tools detect malware on laptops, mobile phones and other devices that access corporate networks. Palo Alto unveiled the Cortex XSIAM (extended security intelligence and automation management) cloud platform in October 2022. Also, Palo Alto challenged Zscaler in Secure Access Service Edge, or SASE.
Palo Alto stock has gained nearly 28% this year.
In early 2024, Palo Alto surprised Wall Street by announcing the "Accelerated Platformization and Consolidation" strategy on its January quarter earnings call. The company told analysts that offering customers deep price discounts if they bought multiple products would result in bigger, long-term deals and help drive next-generation ARR to the $15 billion goal.
The strategy would increase Palo Alto's total addressable market and drive industry consolidation, the company said.
Still, Wall Street was unsure about the strategy, which impacted billings because of vendor financing and deferred payments. Palo Alto changed guidance to a new financial metric, remaining performance obligations. RPO is the total value of contracted revenue that a company has not yet recognized as revenue on its financial statements.
And, some Wall Street analysts fretted about a possible industry price war.
Platformization Jelling?
When reporting July-quarter results, Palo Alto said the platformization strategy was jelling. It pointed to 90 platformization deals in the quarter, up from 65 deals in the previous quarter. Next-generation ARR rose 43% to $4.22 billion, topping estimates of $4.1 billion.
Arora told IBD the time was right to strike with a new marketing move.
"We felt our platforms were ready for prime time, and we have a competitive advantage where we can show the stitching and the value of integrated products," he said. "And I don't think any industry stays static. We have strong competitors and they're smart ones. If the market begins to see us succeed, they will start to replicate our strategy, in which case we have a big time-to-market advantage."
He added: "We pivoted hard and said: This is the new approach for the industry as opposed to selling point solutions. You know, six years ago, we're an $18 billion market-cap company. Today, we're a $110 billion market-cap company. So I think Wall Street has realized that, you know, there is going to be a platform in cybersecurity, and the opportunity for Palo Alto is better than anybody else."
Palo Alto's platformization strategy will pressure rivals to make acquisitions to broaden their product portfolio, analysts say. And, in September, CrowdStrike unveiled its own financial services arm for customers.
Microsoft Is A Rival To Palo Alto Stock
One of Palo Alto's biggest rivals is Microsoft. In 2022, Microsoft had a $20 million cybersecurity business. A key part of its strategy is offering discounts when bundling security products with premium subscriptions to its Office 365 productivity tools.
Arora says Palo Alto isn't just offering price discounts. He says the cloud platform offers cohesive cybersecurity protection from products working together.
"Bundling is a different strategy," he said. "Bundling is when you take four disparate things and say: If you buy all four together, it's cheaper."
As Arora talked about the cybersecurity industry, he noted that once dominant players such as McAfee and Symantec were usurped by new entrants such as CrowdStrike.
"Cybersecurity companies had the reputation of being sort of the flavor of a decade," he explained. "So for 10 years, you'll see cybersecurity companies get stronger and stronger, then they started to plateau, and then the next set of companies came around. That happens because this is one of the most innovative industries in the world. And when new technology frontiers are born, when technology becomes so much better, the old vendors have to go away."
Palo Alto Stock And AI Cybersecurity
But amid the emergence of generative artificial intelligence, Arora is determined not to see feisty AI-native startups eat Palo Alto's lunch.
Cybersecurity firms have used pattern-recognition-type artificial intelligence for real-time analysis of data for over a decade.
In cybersecurity, companies expect generative AI tools to help reduce the time it takes to detect and respond to many forms of computer hacking. Also, they see gen AI automating more functions in security operations centers to help companies deal with a shortage of software engineers.
Arora expects Palo Alto to remain a leader in artificial intelligence cybersecurity. Like Microsoft and Google, Palo Alto's cloud platform inspects huge amounts of data traffic daily to spot criminal activity.
"We now ingest seven petabytes of data a day on a constant basis to look for bad actors using machine-learning AI," he said. "This number used to be four petabytes just seven months ago. Now, for AI to work, you have to have data. So this is the first time I think that incumbents are going to have an advantage by delivering AI capability better than startups, because new startups don't have the data. We're sitting on the data."
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
