Palo Alto Networks (PANW) stock slipped significantly in the wake of the IT security firm’s recently reported fiscal third-quarter results, as a number of its metrics came in below analysts’ average estimates.
However, the company has many favorable attributes, including its rapid growth, which is being driven by the rising popularity of its next-generation security (NGS) tools and the quickly increasing number of its customers that are spending high amounts on its products. Further, PANW is generating impressive profits, while multiple banks are quite bullish on the shares, and the stock’s valuation is relatively low compared to other, large, successful IT security names.
Meanwhile, the leading cybersecurity player appears to be well-positioned to benefit meaningfully from the proliferation of AI and from the huge amount of data that it possesses.
In light of all of these points, investors looking for a large, low-risk, high-growth cybersecurity stock should consider buying Palo Alto’s shares.
Several Misses Cushioned by Rapid Growth
Among PANW’s Q3 metrics that came in below analysts’ average estimates were its backlog, its subscription/support revenue, its gross margin, and its cash flow from operations.
However, the firm’s total revenue climbed by 15% versus the same period a year earlier, while its backlog jumped 19% year-over-year and its next-generation security (NGS) annual recurring revenue soared by 34% YOY. Also importantly, PANW’s earnings per share, excluding certain items, came in at $.80, compared with $.66 in Q3 of 2024. It reported impressive adjusted net income of $600 million, versus $500 million during the same period a year earlier.
The popularity of the firm’s NGS tools may be quickly expanding partly because of PANW’s increased use of AI. For example, in February, Palo Alto unveiled “Cortex Cloud, a next-generation platform that combines the company’s Prisma Cloud and Cortex CDR into a unified artificial intelligence-powered solution for real-time cloud threat detection and response,” silicon ANGLE reported. And in April, PANW “expanded…(the) AI-driven Security Operations Center capabilities” of its Cortex XSIAM product.
Also noteworthy is that PANW appears to have more data on security incidents than many if not most of its competitors.
“We believe our depth and breadth of data is amongst the largest in the industry and is something that point solutions simply cannot access,” CEO Nikesh Arora said during the company’s Q3 earnings call which was held on May 20.
“This leads to superior threat detection efficacy, reduced false positives, and faster incident response times,” Arora added.
PANW has also been able to convince more of its customers to spend large amounts of money on its products. In Q3, for example, 130 of the company’s customers each provided the firm with over $5 million of annual recurring revenue in exchange for its NGS products, representing a year-over-year increase of more than 40% in the number of such customers.
Bullish Banks and a Relatively Low Valuation
In a note to investors on May 21, Truist, a major bank, wrote that PANW is executing effectively and benefiting from the strength of its NGS products. PANW is also getting a lift from its strategy of combining multiple systems into a single platform, according to Truist. The bank kept a $205 price target and a Buy rating on the shares.
And investment bank Rosenblatt also praised the company’s performance while recommending that investors buy the shares at its current levels. Expressing confidence in PANW’s strategy, Rosenblatt kept a $235 price target on the name.
On the valuation front, PANW is changing hands at a forward price-earnings ratio of about 51 times. While that’s not cheap, it’s meaningfully below the forward P/E ratios of many other names in the cybersecurity sector, including CyberArk’s (CYBR) 100, and CrowdStrike’s (CRWD) 131.
A Beneficiary of the Proliferation of AI
As AI proliferates, companies are increasing the speed at which they’re moving data to the cloud, Arora, Palo Alto’s CEO, noted. Of course, all of that data, along with all of the AI infrastructure and models, have to be secured against attacks by hackers, the CEO pointed out. The latter situation, of course, creates a huge opportunity for PANW and its peers.
Additionally, hackers are using AI, increasing the demand for PANW’s products. And finally, Palo Alto is extensively utilizing the technology to increase the effectiveness of its own tools.
*This article is intended to be informational only; it is not financial advice.
