Palo Alto Networks (NASDAQ: PANW) is likely one of the main cybersecurity firms. Its legacy on-line safety merchandise and up to date choices have helped make it a crucial supplier on this trade.
Sadly for Palo Alto, the aggressive nature of the net safety trade means organizations have quite a few decisions in terms of suppliers. Amid that competitors, the query for traders is whether or not Palo Alto inventory can drive outsize returns, or whether or not they need to look to different cybersecurity stocks.
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The state of Palo Alto Networks
Palo Alto has made itself one of many leaders within the crowded however crucial cybersecurity trade. Consequently, potential clients and traders might select this firm merely for that cause.
One other issue is the state of the general trade. Fortune Enterprise Insights forecast the compound annual growth rate (CAGR) of the cybersecurity trade at 14% by 2032. Thus, Palo Alto ought to profit from that elevated demand for the foreseeable future.
Furthermore, opponents equivalent to CrowdStrike or Zscaler stand out for one product kind. In distinction, Palo Alto has taken a extra generalized strategy to cybersecurity regardless of the rising reputation of its next-generation firewall. With its strategy, its progress barely outpaced firms like Test Level Software program and Fortinet however has underperformed in comparison with CrowdStrike and Zscaler.
That diversification is a combined blessing in different areas, too. It will presumably place Palo Alto on the forefront of a pattern for firms to supply all cybersecurity merchandise from one supplier. Nonetheless, traders soured on the inventory early final 12 months after Palo Alto supplied some modules at no cost to offer firms an incentive to buy all cybersecurity providers from the corporate.
Over time, the inventory recovered to the purpose that it grew modestly over the previous 12 months, and it even initiated a 2-for-1 stock split. Nonetheless, Palo Alto’s financials mirrored among the combined emotions traders might have towards the inventory, and the inventory struggled to realize traction.
Palo Alto by the numbers
Within the first quarter of fiscal 2025 (ended Oct. 31, 2024), income grew 14% in comparison with the identical quarter in fiscal 2024. This may increasingly replicate the aforementioned trade CAGR, nevertheless it consists of vibrant spots such because the annual recurring income for its next-generation firewall, which grew 40%.
Palo Alto additionally managed the expansion in working bills, limiting them to a 9% improve. Consequently, the $351 million in net income in fiscal Q1 was far above the year-ago revenue of $194 million.
Moreover, Palo Alto seems to be on observe for extra of the identical. In fiscal 2025, the corporate forecasts 14% income progress. Nonetheless, it expects next-generation firewall ARR will increase to sluggish to 31% or 32%. That progress might not essentially translate into extra investor curiosity. Traders might like its 48 P/E ratio, which seems enticing contemplating its trade and the web losses that many friends proceed to report.
Nonetheless, from a price-to-sales (P/S) ratio standpoint, its inventory is costlier than all of its closest opponents apart from CrowdStrike. Moreover, CrowdStrike grew income at 29% in its most up-to-date quarter, greater than double that of Palo Alto. Thus, Palo Alto’s valuation might seem much less interesting than its friends.
PANW PS Ratio information by YCharts
Ought to I purchase Palo Alto Networks inventory?
Below present circumstances, Palo Alto inventory doesn’t appear like a purchase, not less than in comparison with different cybersecurity shares. Certainly, Palo Alto has matched the trade’s progress, and given the rising demand for its providers, it is going to possible proceed to prosper as a enterprise.
Sadly, different cybersecurity firms have outpaced its progress fee. Moreover, its inventory is relatively costly if measured by its gross sales a number of.
Amid these components, Palo Alto inventory is unlikely to outperform its friends for the foreseeable future. Whereas its efficiency is enough to justify holding the inventory, traders ought to in all probability chorus from including shares presently.
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Will Healy has positions in CrowdStrike and Zscaler. The Motley Idiot has positions in and recommends Test Level Software program Applied sciences, CrowdStrike, Fortinet, Okta, and Zscaler. The Motley Idiot recommends Palo Alto Networks. The Motley Idiot has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the creator and don’t essentially replicate these of Nasdaq, Inc.
