Palo Alto Networks: A Promising Cybersecurity Investment Amid AI Boom

Palo Alto Networks: A Lot In Its Favor For 2025 - Initiating With A Buy (NASDAQ:PANW)

I hereon share my positive sentiment on Palo Alto Networks and why I think the company will outperform the S&P 500 in 2025. Palo Alto Networks (NASDAQ:PANW) reported earnings last Monday, causing the stock to trade higher the next day on management's raised guidance for FY25 and double beat for the quarter. Palo Alto's commentary and outlook lead me to believe the company has more upside surprises in terms of ARR growth from its platformization progress; the latter is an integrated platform approach in which security functions are consolidated to achieve enhanced security and reduced complexity at a cost-saving price. This quarter, Palo Alto's Next-Generation Security or NGS ARR grew 43% year-over-year, taking the company one step closer to achieving its $15 billion NGS ARR target by 2030. I also believe CrowdStrike's (CRWD) outage earlier this quarter will open wider market share opportunities for Palo Alto in the extended detection and response or XDR market in the near term; XDR is a cybersecurity approach that integrates and unifies data from several security solutions to enhance detection and visibility into advanced threats. This quarter, the company's revenue was $2.2 billion, up ~13% year over year, and beat consensus by $40 million. Non-GAAP EPS of $1.51 beat consensus by $0.10. The better-than-expected results are not a one-time thing, in my opinion. In other words, this quarter shows green shoots for Palo Alto's position in the cybersecurity space based on two factors working in the company's favor: platformization that'll allow the cross-selling of solutions at a more affordable rate and the benefit from CrowdStrike's struggle. I see these positives materializing into outperformance for Palo Alto against the S&P 500 and CrowdStrike in 2H24, particularly if the Fed cuts interest rates in September, as it is highly anticipated to do. This would act as a booster for enterprise and corporate spend on IT, which is a plus for Palo Alto as cybersecurity spending remains a top spending priority in 2024. The company is up ~8% on the one-month chart, against the S&P 500, up 2.05%, and CrowdStrike, down ~11%. The stock has a lot working in its favor in 2H24 and 2025. As I previously mentioned, the stock soared after earnings on positive 1Q25 and FY2025 guidance and top and bottom line beats. Before disclosing the numbers, management announced shifting its guidance metrics and forecasting for NGS ARR and RPO starting this quarter as they focus on platformization strategy after consulting their largest shareholders and comparing themselves with peer companies, including Adobe, Salesforce, and ServiceNow. This is a positive way for investors to get a better understanding of Palo Alto's growth trajectory, as the old method of reporting didn't reflect their medium-to-long-term growth potential and shareholder value. In my opinion, this is a step in the right direction and will help investors better determine their money's worth. Starting this quarter, Palo Alto will guide NGS ARR quarterly and annually with revenue and will provide a total RPO outlook quarterly and annually to help investors better "understand the size of our book of committed contracts, compared to their future expectations of our revenue." Palo Alto is guiding for revenue in the range of $2.10 billion to $2.13 billion next quarter, a 12% to 13% increase year over year versus consensus at $2.10 billion, and non-GAAP net income per share to come in at $1.47 to $1.49 versus consensus at $1.42, with a 7% to 8% increase year over year. The company expects NGS ARR in the range of $4.33 billion to $4.38 billion, a 34% to 46% increase year over year, and an RPO of $12.4 billion to $12.5 billion, with a 19% to 20% increase year over year. The fiscal year 2025 guidance entails that NGS ARR will make up 60% of total revenue in FY25, following the upward trend from FY22 at 34%, FY23 at 43%, and FY24 at 53%, as seen below from the 4Q24 presentation. NGS ARR is forecasted to come in at $5.42 billion to $5.47 billion, a 28% to 30% increase year over year, and RPO to be in the range of $15.2 billion to $15.3 billion with a 19% to 20% increase year over year. Palo Alto now expects revenue of $9.10 billion to $9.15 billion, a 13% to 14% increase year over year, and non-GAAP EPS of $6.18 to $6.31, a 9% to 11% increase. Operating margins and free cash flow are forecasted for a double-digit growth of 27.5% to 28% and 37% to 38%, respectively. With the rise of AI, attacks are now more malicious than ever. The scale of these attacks is "beyond the capabilities of defenses that rely solely on humans," which is raising the need for several complex detection systems to work together against threats, which for Palo Alto is known as platformization. In my opinion, the appetite for this has already been reflected in the acceleration of bookings in 2HFY24. Palo Alto drove the top line above the overall cybersecurity market and showed improved profitability and strong cash flow this quarter. RPO came in 20% higher than a year ago quarter, and next-generation security offerings showed strong growth through exceeding the $4 billion target in 4Q24. NGE ARR grew 43% to $4.2 billion, up from zero six years ago. Average ARR-led platformized customers increased over 10% since 1Q; in the simplest terms, this means management is noticing an uplift in ARR. Interest in platformization is at an all-time high, with a 70% year-over-year increase in senior-level customer meetings in 2HFY24 and more intensely in 4Q. Their eight-figure deal with the existing firewall and XSOAR customer is also a testament to customer interest and demand for their services. Said customer is now reducing costs and "achieving a more consistent security," moving them one step closer to a Zero Trust Network transformation. I believe many others will see the benefits of this approach and adopt it in the near term. In my opinion, Palo Alto is sitting on gold, and regardless of the conservatism around platformization six months ago, this quarter's results prove that the company is on the right track. Palo Alto currently has a market cap of $115.27 billion. The trailing P/E ratio is 49.42, and forward P/E is 56.82, meaning it is priced at a premium. The company's PEG ratio is at 2.69, indicating the company is overvalued. In my opinion, investors are pricing in future positives and the company's mid to long-term growth potential. I don't believe this is worrisome at the moment, as I believe Palo Alto is now better positioned to realize the earnings growth that is priced into its valuation. The current positive investor sentiment on Palo Alto also reflects this. Over 25% of Street Analysts give the stock a strong buy, and around 46% give it a buy. No Street Analysts give it a sell, and around 28% give the stock a hold. I believe the company has the momentum to outperform again in 1Q25 and is better positioned for profitable growth as platformization shows up in ARR and continuous NGS ARR growth. The current median PT is seeing an upward trajectory from $340 in May, $345 in June, and $350 in July, and jumped significantly to $385 at current levels. The current mean PT witnessed the same upward trend from $337.7 in May, $339.88 in June, $341.5 in July, and is currently at $376. I believe this is a reflection of investor confidence in the growth potential the company has with its platformization success drawn all over 4Q24 results and FY2025 guidance. Operating margins are improving and were expanded by 320 basis points this quarter and by over 800 basis points since FY2021; since then, management has shown a shift to profitable growth, which we can see through a free cash flow margin of 39% at $3 billion this quarter. Since FY2020, the proportion of bookings has increased from 6% to 30%, backed by customer preference for over-time payments, for which the company is absorbing the change. I believe that the cybersecurity threat landscape is expanding, and with it, Palo Alto's opportunity to expand its customer base, especially now in light of CrowdStrike losing customer and investor confidence with its latest update bug. Management has several eggs in several baskets, each of which has shown growth in the last quarter, as I discussed earlier; I expect this upward trend to continue into FY2025. AI Threat and Opportunity Around 1,000 of Palo Alto's customers are interested in AI access, and the company can now deploy it to all 6,000 Prisma access customers or infuse AI firewalls in their virtual firewall customers with a simple click of a button. I believe the opportunity Palo Alto has around AI, while in its early stages, is something to be tracked. The company announced its suite of AI security offerings and, over the last few weeks, has been in the process of releasing the following products: AI Access, the AI Firewall or runtime security, and AI security posture management, making them "the first to the market with a comprehensive portfolio for secure AI by design." These solutions have exceeded $200 million in AI ARR, which reflects the traction in XSIAM. XSIAM generated $500 million in bookings in FY2024, up x2 from FY23, and active customers are up 4x during that same period. This also brought an additional $900 million in ARR Cortex. The company finished FY24 with 30 customers, making ~$1 million in XSIAM ARR. So, how does this reflect on the customer? The median time to remediate is down from days to under ten minutes for over 50% of customers. This pretty much means the company is anticipating firewalls and issues very early on, and I believe that will continue to form a bigger part of ARR in FY25. Palo Alto also stands out from the broader tech sector that's currently under pressure, and it's using AI to do so; the company previously allocated around 300 people to solve employee tickets, making up around 2% of its workforce. A week ago, the company launched an AI employee experience that helped reduce the numbers by a staggering 50% and is expecting it to go down another 80% through task automation. Although still in its early innings with AI, I believe Palo Alto is taking a promising approach to infusing AI into its solutions and saving itself time and the money. Market share in XDR: You're no stranger to the last CrowdStrike bug update that caused a global outage in devices with Microsoft Windows. Though this wasn't a breach, the market reacted negatively, and many companies started to explore alternatives to CrowdStrike. This works in Palo Alto's interest, giving the company a lower threshold to excel in the XDR market and take a bigger share of it. Management discussed the incident briefly but made sure to reiterate that their products use an approach that deploys a "1% to 3% wide sample test cohort to ensure no issues, and then we release content updates in a phased manner" while allowing customers to have control over the update process. I am a strong buy on CrowdStrike and believe the company will eventually rebound. However, my sentiment there is not mutually exclusive to my positive outlook on how CrowdStrike's struggle could help Palo Alto regarding near-term heightened migration to its service and higher customers. The company hasn't noticed any changes so far, but I anticipate this will reflect in more customers for Palo Alto in 1Q25.

1 No-Brainer Artificial Intelligence (AI) Stock to Buy With $370 and Hold for 10 Years | The Motley Fool

Artificial intelligence is a revolutionary technology, but it can also pose a serious threat to businesses without adequate cybersecurity. Earlier this year, Palo Alto Networks (PANW -1.03%) reported seeing a tenfold increase in the frequency of email-based phishing attacks compared to the same period in 2023. The jump is related to malicious actors using generative artificial intelligence (AI) to rapidly craft realistic content to trick employees into handing over sensitive information. This change in tactics means businesses need to change the way they think about cybersecurity. Palo Alto is weaving AI into many of its products to make them faster and more automated, which can help combat AI-based threats. However, some businesses are also putting their valuable data at risk by experimenting with AI themselves in an insecure manner, so Palo Alto is releasing new tools to protect them, too. Here's why investors with some idle cash -- money they don't need for immediate expenses -- might want to consider allocating $370 to Palo Alto stock and holding it for the next decade. Palo Alto's cybersecurity software portfolio is spread across three different platforms: cloud security, network security, and security operations. And the company is weaving AI into as many products within each category as possible. The Cortex XSIAM security operations solution is a great example. Palo Alto says 90% of security operations centers within organizations still rely on manual processes, and human managers simply can't keep up with the sheer volume of alerts, so 23% of incidents are left uninvestigated. XSIAM uses AI to automate incident response and remediation, and Palo Alto says more than 50% of customers have reduced their median time to resolution (MTTR) to under 10 minutes -- from several days previously. During fiscal 2024 (ended July 31), the number of customers using XSIAM soared fourfold compared to fiscal 2023, and bookings more than doubled to $500 million. Those are solid results considering the tool is only around two years old, and it highlights the surging demand for AI-powered security. But as already mentioned, Palo Alto is also focused on protecting customers who are using AI. It's introducing new tools for its network security platform like AI Access Security, which assigns a risk score to hundreds of third-party generative AI applications. AI Access shows managers how employees are using those apps to ensure safe deployment, and the tool also offers data controls and an ability to block specific apps entirely. Deployment couldn't be easier. All 5,000 existing Prisma Access customers will soon be able to use AI Access, and it will be as simple as flipping a switch. Around 1,000 customers expressed interest during the pilot program, so Palo Alto will soon unlock even more revenue from its existing users. Palo Alto generated $8 billion in total revenue during fiscal 2024, which was a 16% increase from the year-ago period. That marked a deceleration from fiscal 2023, but there is a roaring trend beneath the surface. Annual recurring revenue (ARR) attributable to Palo Alto's next-generation security (NGS) customers soared 43% to $4.2 billion in the fourth quarter. NGS refers to "platformization" customers. These are customers who have shifted the majority (or all) of their cybersecurity stack over to Palo Alto. In the past, the cybersecurity industry was fragmented because many vendors only specialized in specific products, which meant businesses had to stitch their security stack together from multiple sources. That opened the door to unacceptable vulnerabilities, so providers like Palo Alto and CrowdStrike are now focused on "platforming" their customers. Palo Alto says customers who use all three of its platforms have a lifetime value that is 40 times greater than customers who use just one. That presents a huge opportunity, so Palo Alto has offered many customers fee-free periods to help them transition away from their existing cybersecurity providers, which is a key reason why the company's total revenue growth has decelerated recently. Over the long term, however, this strategy should pay off in a very big way. Palo Alto thinks it can more than triple its NGS revenue to $15 billion by 2030, as it expects up to 3,500 of its top 5,000 customers to take a platform approach to cybersecurity by then. The majority of that revenue will be recurring, which builds predictability into Palo Alto's business for investors. Palo Alto stock currently trades at a price-to-sales (P/S) ratio of 15.4, which makes it 23% cheaper than its main rival, CrowdStrike. CrowdStrike consistently grows its total revenue more than 30%, so its stock might deserve a small premium under ordinary circumstances. But investors should consider two things: Therefore, I'd argue Palo Alto stock deserves to trade higher than where it is today. Its current valuation looks like a great entry point for investors, especially those who can stay the course for the next 10 years while the company reaps the rewards of platformization.