Over the last decade, Palo Alto Networks (NASDAQ:PANW) has proven to be a wealth-generating powerhouse for investors, witnessing an extraordinary surge of 1,345% since January 2014. This performance significantly outpaces the Nasdaq Composite ($NASX), which recorded a comparatively modest 290% gain during the same period. As part of the rapidly expanding cybersecurity industry, Palo Alto Networks is positioned to benefit from the increasing demand for cybersecurity solutions driven by the proliferation of connected devices, the rise of remote work, and the digital transformation of companies across sectors.
The cybersecurity sector is often considered recession-resistant, given that enterprises are unlikely to cut spending on safeguarding against cyber threats, even during market downturns. This characteristic positions Palo Alto Networks and its industry peers to generate consistent cash flows across various market cycles. The question now is whether PANW stock can maintain its outperformance in 2024 and beyond.
Strong Demand Propels Palo Alto Networks
Palo Alto Networks specializes in providing enterprise-facing cybersecurity solutions, leveraging threat intelligence and automation to enhance customer engagement and retention rates. During a recent earnings call, the company emphasized the increasing severity and frequency of ransomware attacks, anticipating a surge in demand for its products and solutions. Notably, there has been a 37% rise in multi-extortion ransomware attacks, coupled with a 28% increase in the average ransomware payment.
In fiscal Q1 of 2024 (ended in October), Palo Alto Networks achieved a 20% year-over-year growth in sales, with billings up by 16%. The remaining performance obligations (RPO) saw a substantial 26% increase to $10.4 billion, surpassing the total sales of $7.2 billion in the preceding four quarters. The company’s asset-light model enabled a 760 basis points expansion in operating margins, concluding the quarter with $1.5 billion in adjusted free cash flow.
Palo Alto Networks’ next-generation security business currently generates annual recurring revenue of $3.23 billion, indicating that approximately 46% of its top line is tied to subscriptions, resulting in predictable cash flows.
Is Palo Alto Networks a Buy?
Analysts foresee an 18.7% year-over-year increase in PANW’s sales to $8.2 billion in fiscal 2024, followed by an 18% growth to $9.66 billion in fiscal 2025. Adjusted earnings are expected to rise by 22.5% over the next five years. However, with a forward price-to-earnings multiple of 52x and a forward sales multiple of 11 times, Palo Alto stock is deemed expensive. In comparison, the sector median forward price-to-earnings multiple is significantly lower at 23.5x.
While the lofty valuation may curb expectations for market-thumping gains in the upcoming decade, Palo Alto Networks continues to demonstrate impressive profit margin expansion, justifying its premium valuation.
Target Price and Analyst Sentiment
Susquehanna, an investment firm, recently initiated coverage on PANW with a “positive” rating and a bold Street-high price target of $400. This target implies a substantial upside potential of nearly 40%. Analyst Shyam Patil, in a note to clients, justified the premium valuation, stating, “We acknowledge the company is trading at a premium but see this as well-deserved given the premium nature of the asset.”
While most of Wall Street holds a bullish outlook for PANW, with 32 out of 39 analysts recommending a “strong buy,” two suggesting a “moderate buy,” and five advising a “hold,” the average 12-month price target stands at $293.50. This indicates a more conservative upside potential of 2.5%, reflecting a diversity of opinions regarding the stock’s future performance.
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Author Faith Yakubu 
