Palo Alto Networks Stock: Should You Buy Now?

Palo Alto Networks (PANW -1.23%), recognized as one of the largest and most influential cybersecurity companies globally, has proven to be an exceptional long-term investment for growth-oriented investors. For those who had the foresight to invest $1,000 during its IPO in 2012, that initial investment would now be valued at approximately $26,500, showcasing the remarkable growth trajectory of this tech giant.

Despite reaching a record high stock price of $202.95 in early December, Palo Alto’s shares are currently trading at less than 10% below that peak. This begs the question: Should potential investors consider purchasing stock now and anticipate even greater returns, or is it wiser to wait for a potential dip before initiating a new position?

Image source: Getty Images.

Examining the Rapid Growth of Palo Alto Networks

From fiscal year 2014 to fiscal year 2024, which concluded in July 2024, Palo Alto Networks experienced an impressive revenue growth rate of 30% compounded annually. Initially, much of this growth was attributed to its Strata platform, which includes advanced next-generation firewalls and on-premises network security solutions. However, in more recent years, the company’s expansion has predominantly stemmed from its two next-generation security (NGS) ecosystems: Prisma, which focuses on cloud-based services, and Cortex, which leverages AI technology for advanced threat detection and response.

Currently, Palo Alto tracks its growth using three essential metrics: the growth of remaining performance obligations (RPO), which refers to the contractual commitments that have not yet been recognized as revenue; the annual recurring revenue (ARR) growth from its NGS ecosystems; and overall total revenue growth.

Data source: Palo Alto Networks. YOY = Year over year.

While Palo Alto’s RPO and NGS ARR growth rates have slowed somewhat over the past year due to macroeconomic challenges that have complicated the acquisition of substantial contracts and the ability to cross-sell additional services, its total revenue growth showed a slight uptrend in the initial quarter of fiscal year 2025.

Looking ahead to the second quarter, Palo Alto anticipates an RPO growth of 20%-21% year-on-year, a 35%-36% increase in NGS ARR, and an overall total revenue growth between 12% and 14%. For the entirety of the fiscal year, the company projects RPO growth of 19%-20%, NGS ARR growth of 31%-32%, and total revenue between $9.12 billion and $9.17 billion.

During the most recent conference call, CEO Nikesh Arora highlighted that the expansion of artificial intelligence represents the “biggest signal” for their near-term growth trajectory, as the emergence of faster and more sophisticated AI-driven cyber threats is prompting an “enhanced security posture and increased spending from CIOs.”

Understanding the Profitability of Palo Alto Networks

Palo Alto Networks achieved profitability based on generally accepted accounting principles (GAAP) in fiscal year 2023, with its GAAP net income increasing nearly sixfold in fiscal year 2024. This significant milestone was reached through strategic cost-cutting measures and a reduction in stock-based compensation expenses. This success has quieted skeptics who doubted the company’s ability to achieve break-even results.

Nonetheless, the company continues to report its margin and earnings per share (EPS) on an adjusted (non-GAAP) basis, which excludes short-term fluctuations for a clearer picture. Over the past year, Palo Alto’s adjusted gross margin has seen a slight decline as it implements its “platformization” strategy, which includes offering loss-leading trials, promotional offers, and deferred revenue arrangements for its newer cloud-based services. This approach is designed to attract customers from smaller, less diversified cybersecurity firms.

Data source: Palo Alto Networks.

Despite the slight contraction in its gross margin, Palo Alto’s adjusted operating margin continued to show year-over-year expansion as the company effectively streamlined its expenditures to counteract the short-term pressures on its gross margin. For the second quarter of fiscal year 2025, the company anticipates its adjusted EPS to increase by 5%-6%.

For the full fiscal year, the company expects its adjusted operating margin to rise by 20-70 basis points year over year, reaching a range of 27.5%-28%, while adjusted EPS is projected to grow by 10%-13%. At a stock price of $186, Palo Alto’s valuation appears steep at 59 times the midpoint of that forecast. In comparison, its slower-growing competitor, Fortinet, trades at a more modest 39 times its forward adjusted earnings.

However, Palo Alto remains competitively priced compared to higher-growth, cloud-native cybersecurity leaders like CrowdStrike and Zscaler, which trade at 82 and 65 times their forward earnings, respectively, indicating a potential value opportunity for investors.

Evaluating the Optimal Timing for Investing in Palo Alto Networks

Palo Alto Networks’ stock has consistently traded at elevated valuations since its market entry, a premium that is justified by the company’s scale, extensive diversification, and impressive growth metrics. While this elevated multiple may restrict short-term appreciation, investors with a horizon of several years or more should contemplate purchasing shares at current levels to capitalize on future growth potential.