Why Palo Alto Networks Is a Buy After Its Fiscal Fourth-Quarter 2018 Report

Strong results, a fast-growing industry, and a new high-profile CEO at the helm were the high points at fiscal year-end.

Cloud-based cybersecurity outfit Palo Alto Networks (PANW 4.19%) exceeded expectations during its quarter ended July 31. The company has multiple tailwinds at its back and is making the most of its opportunities. Though the stock is hovering near all-time highs, now looks like as good a time as ever to buy in.

A fiscal year in review

Palo Alto Networks' most recent report was the last one for its 2018 fiscal year. Though profits continue to be sacrificed in the short term, the payoff for shareholders is a company growing faster than the overall cybersecurity industry (management said cybersecurity is expected to grow 9% per year in the next five years).

Metric	Fiscal 2018	Fiscal 2017	Year-Over-Year Increase (Decrease)
Revenue	$2.27 billion	$1.76 billion	29%
Gross profit margin	71.6%	72.9%	(1.8%)
Operating expenses	$1.76 billion	$1.46 billion	20.5%
Earnings (loss) per share	($1.61)	($2.39)	N/A
Adjusted earnings per share	$3.99	$2.71	47.2%

Data source: Palo Alto Networks quarterly earnings.

Palo Alto is getting a bump from an overall expanding security industry. Businesses are dealing with digital transformation, which is complicating their efforts to keep both legacy and new systems safe and secure. Additionally, bad actors are getting smarter, using cutting-edge technology to wreak havoc and steal sensitive data.

As an early adopter of the cloud-based software model, Palo Alto is winning as these businesses look for a comprehensive way to stay protected. New CEO Nikesh Arora had this to say:

Enterprises are in the early stages of the cloud revolution. This poses new security challenges for businesses worldwide. We are becoming the strategic partner of choice to help businesses embrace the cloud and protect their digital information by reducing complexity and providing the same level of consistency, integration, and automation that we brought to network security.

An illustration of a cloud -- representative of a centrally-based server -- with computers hooked up to it via the internet.

Image source: Getty Images.

A shift in management style

It was an exciting end to the current fiscal year for owners of the cybersecurity outfit. Not only did the company's aggressive reinvestment into operations pay off with another double-digit top-line return, but that pace appears to be set to continue. Deferred revenue, sales that have been received but not yet realized until services are provided, increased 33% year over year in the last quarter to $2.4 billion.

The next fiscal year looks like it will get off to a strong start, too. Revenue is expected to grow 25% to 27% from the same period last year. Adjusted earnings should be $1.04 to $1.06 compared with $0.74 a year ago.

Outside of financial news, CEO Nikesh Arora -- a top operations executive at Alphabet's Google during its early formative existence and president of Japan's SoftBank for a couple years -- took the reins back in June. Value investors may be scared away by Palo Alto's lack of profitability (on a non-adjusted basis), but Arora indicated a departure from foot-on-the-gas growth strategy may be forthcoming. He said this during the conference call:

I intend to run the business for the long term. Being a student of Warren Buffett, I'm going to be focused on generating long-term value, balancing investment in the business, which will allow us to grow and succeed, with a need to provide returns to our shareholders.

Addressing curiosity over how mergers and acquisitions might be handled, Arora struck a similar tone and said the first consideration in making a buyout would be solving customers' problems first and foremost. Shareholder-value creation -- both organic and from acquisitions -- should follow over the long term.