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Is Now a Good Time to Load Up on Palo Alto Networks Stock?

By Harsh Chauhan – Nov 6, 2018 at 9:09PM

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This cybersecurity specialist looks like a bargain.

Broad market weakness has led to a sharp pullback in Palo Alto Networks (PANW 1.04%) stock since the beginning of September. Shares of the cybersecurity specialist are now trading well below their 52-week highs, giving savvy investors an opportunity to load up on shares.

Let's take a look at why now's a good time to buy.

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More value for money

Part of what makes this stock tempting is that Palo Alto's recent drop has made the stock more affordable. The company is now trading at 34 times next year's earnings and this is significantly lower than the industry average P/E of 99.9.

The stock may endure more short-term pain, but Palo Alto Networks is a long-term play on the cybersecurity opportunity. The company has been making all the right moves for the past few years to increase its footprint in this space, getting into lucrative areas that will potentially lead to more business. The important thing to note is that its strategy of growing its operations by way of acquisitions has led to accelerated customer growth in recent quarters, a trend that looks set to continue after its latest move.

Why Palo Alto will get better

Palo Alto's acquisitions over the years have done more than just boost the company's customer count. By getting into a new cybersecurity vertical, the company gains access to a new set of solutions that it can offer to its existing client base, while the newly added clients can tap into the company's existing offerings. This is how Palo Alto creates a solid opportunity to cross-sell its solutions to both new and existing customers.

Not surprisingly, Palo Alto customers have been spending more money on its products and services to shore up their cyberdefense infrastructure. This has allowed the company to lower its outlay on sales and marketing costs as a percentage of total revenue. Looking ahead, Palo Alto should witness stronger cross-selling opportunities, as it has acquired cloud security provider RedLock for $173 million.

This acquisition comes close on the heels of Palo Alto's purchase, which was completed in March for $300 million. The company now plans to combine and RedLock to create an integrated cloud security solution that will bring advanced threat detection, real-time security, analytics, and compliance monitoring onto a single platform.

Palo Alto believes that this integration will help its cloud customers reduce their threat response time by enabling Palo Alto to automatically investigate risks and offer real-time remedies.

The company already has a 6,000-strong base of cloud security customers using its existing services. It will have a comprehensive product to offer them once the unified solution is launched in early 2019, which should eventually lead to stronger top-line growth and also improve margins.

More importantly, the RedLock acquisition bolsters Palo Alto's position in the burgeoning cloud security market, which is growing at a compound annual growth rate of over 25%, according to one estimate.

Because of this, Palo Alto investors can expect the company to keep up its terrific growth momentum in the long run and achieve profitability sooner rather than later. Analysts peg the company's five-year earnings growth rate at over 30% a year. And it won't be surprising to see Palo Alto grow at such an impressive pace thanks to the way it is expanding its business and attacking the cybersecurity opportunity at large.

For all these reasons, Palo Alto's pullback presents a nice buying opportunity for anyone looking to tap into the lucrative cybersecurity market.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.

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