Palo Alto’s (PANW) strong and growing ability to benefit from the rapid proliferation of AI, along with its impressive financial results and relatively low valuation, make it a buy for some investors seeking to get increased exposure to IT security stocks.
Also importantly, the firm’s federal business appears to be expanding significantly.
Increased Demand for ai security after a recent, major attack
In a May 29 column, I noted that, amid the AI revolution, the accelerating transfer of data to the cloud and the expansion of AI infrastructure were potential, positive catalysts for PANW and its peers. Among Palo Alto’s other opportunities were hackers’ utilization of AI and PANW’s use of the technology to enhance the efficacy of its own products, I reported.
Now a recent hacking attempt using AI, along with a key acquisition by Palo Alto and a new tool released by the company, should meaningfully increase its ability to benefit from the accelerating use of AI over the longer term.
On November 13, leading agentic AI developer Anthropic reported that multiple entities, possibly from China, had utilized its “AI coding tool” in an effort to hack “about 30 global organizations — and had success in several cases,”Axios explained. According to Palo Alto CEO Nikesh Arora, the incident represented “the first reported case of an AI agent autonomously conducting a large-scale nation-state cyber attack.” And the company’s comprehensive security system, which Arora calls a “platform approach,” reduces “latency,” the CEO stated. Lowered latency, in turn, undermines cybersecurity, he said.
Obviously, Arora’s assessment of his own company’s IT security system is highly biased. However, Google’s AI Overview does report that, “Latency in IT security is the delay in data transmission, which can be a significant security risk because high latency slows down threat detection and response, allowing attackers more time to cause damage.” And as one of the world’s leading IT security companies, Palo Alto is likely well-positioned to benefit from increased fears about the hacks of AI systems in the wake of the attack against Anthropic.
Also indicating that this opportunity could be lucrative for the company and its peers, one recent study found that “Just 57% of organizations reported having acceptable use policies for AI tools, and only 55% stated that access controls for AI agents were in place.”
an Acquisition and a new product bolster panw’s ability to secure ai systems
Palo Alto has agreed to acquire Israel-based identity security firm CyberArk (CYBR). As I noted in a previous article, CyberArk’s identity security system regulates the ability of AI agents to access “data and infrastructure,” and its tools protect AI agents from attack. Additionally, “tech instructor Gil Adda, who does not appear to be affiliated with CyberArk…wrote that the company’s AgentGuard ‘counters’ the main cybersecurity threats to AI agents.” In light of these points, along with CyberArk’s overall success (its revenue in the third quarter was $342.8 million, representing a 43% gain versus Q3 of 2024), I believe that the acquisition will increase the extent to which Palo Alto can protect AI systems.
Meanwhile, Palo Alto’s new Prisma AIRS 2.0 product, introduced last quarter, offers ” customers….end-to-end protection across the entire AI application lifecycle, securing everything from autonomous agents to the models themselves.”
A Growing Federal Business and Strong Overall Financial Results
In my previous column on Palo Alto, I predicted that the firm would see benefits from a hack of the National Nuclear Security Administration. My forecast may have been correct, as Arora stated that the company had obtained a $33.5 million contract from a U.S. “cabinet agency” last quarter. He also reported that the company’s federal business “had a strong quarter and notable competitive wins.”
In Palo Alto’s fiscal first quarter which ended in October, its revenue climbed 16% versus the same period a year earlier to $2.5 billion, while its remaining performance obligations surged 24% year-over-year to $15.5 billion. Finally, excluding certain items, its net income came in at $662 million, up from $545 million.
Valuation and the Bottom Line on PANW
Palo Alto changes hands at a forward price-earnings ratio of 49.5 times, well below the forward P/E ratio of 57.8 times at which it changed hands at the end of October and far below the valuation of many other leading tech names. For example, another top IT security firm, CrowdStrike (CRWD), has a forward P/E ratio of 105 times, and Tesla’s (TSLA) equivalent metric is 192 times.
In light of Palo Alto’s very promising opportunities and attractive valuation, I recommend that growth investors looking for increased exposure to the cybersecurity sector consider buying the shares.
*This article is intended to be informational only; it is not financial advice.
