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Here's Why Palo Alto Networks Stock Could Go Higher

By Harsh Chauhan – Sep 23, 2021 at 6:10AM

Key Points

  • Palo Alto Networks is on track to deliver another year of solid growth.
  • Its focus on fast-growing cybersecurity niches such as cloud security and automated threat detection and response points toward a bright future.
  • Growth-oriented investors shouldn't worry about Palo Alto's rich valuation, as it can outperform the broader cybersecurity market.

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The cybersecurity specialist's metrics indicate that its momentum is here to stay.

It was just over two months ago that Palo Alto Networks (PANW 5.00%) stock looked all set to break out of mediocrity and lift off on the back of its fast revenue growth, improving outlook, and a tremendous end-market opportunity. The cybersecurity specialist's shares jumped big time after it delivered a solid set of results on Aug. 23.

But if you missed out on Palo Alto's recent rally, don't be disappointed. The cybersecurity stock seems primed to fly higher from here.

PANW Chart

PANW data by YCharts

Palo Alto Networks is pulling the right strings

For its fiscal year 2021, which ended July 31, Palo Alto booked $4.26 billion in revenue, an increase of 25% over the previous fiscal year. Management expects essentially identical growth in fiscal 2022, forecasting revenue will land between $5.27 billion and $5.32 billion. Non-GAAP earnings per share are expected within the $7.15 to $7.25 range, which would translate into a 17% year-over-year increase at the midpoint.

At Palo Alto's 2019 annual meeting, management had forecast fiscal 2022 revenue of $5 billion. But the impressive growth in the cloud security and next-generation firewall markets has been a big tailwind for the company in recent quarters. For instance, the annualized recurring revenue (ARR) of its next-gen security (NGS) offerings jumped to $1.18 billion in fiscal Q4 2021, an 81% increase over the prior-year period and higher than the company's guidance of $1.15 billion.

Person looking at a line chart on a laptop.

Image source: Getty Images

The company's NGS ARR represents the annualized allocated revenue of all active contracts from the Prisma and Cortex solutions, as well as some cloud-based security services. Management has pointed out that a higher mix of recurring revenue is helping the company improve the predictability of its revenue. The best part is that Palo Alto anticipates further improvements in this metric.

Palo Alto expects NGS ARR to increase 40% to 44% year over year to a range of $1.65 billion to $1.70 billion in the current quarter. Such impressive growth isn't surprising, as Palo Alto is going all out to increase its NGS offerings. Two-thirds of the 29 new product releases from Palo Alto last fiscal year were in the NGS space.

As a result, Palo Alto finished the previous quarter with more than 2,700 Prisma Cloud customers, a 47% jump over the prior year. Similarly, the number of Cortex customers jumped to 2,900 from 1,500 in the year-ago period. Investors can expect this impressive growth to continue as Prisma and Cortex address the needs of fast-growing cybersecurity niches.

Prisma Cloud is a cloud-native security platform, which allows Palo Alto to cater to a market that's reportedly clocking a compound annual growth rate of 22.6% and could hit $32 billion in revenue by 2027, according to a third-party estimate. Cortex, meanwhile, is an automated threat detection and response platform. Again, this gives Palo Alto the opportunity to dip into a lucrative space that's growing at nearly 17% a year, as per a third-party estimate.

Palo Alto is not just rapidly increasing its customer count in these areas; it's also enjoying higher customer spending. The company finished the fourth quarter of its fiscal 2021 with 986 customers that had spent $1 million or more in bookings over the past four quarters, a 31% increase over the prior-year period. This was the largest year-over-year growth in that category of high-value clients in the past three years.

The combination of increased spending and a fatter customer count led to a 32% year-over-year increase last quarter in Palo Alto's deferred revenue to $5 billion, which exceeded the actual growth in revenue. This bodes well for the company, as deferred revenue is the money collected in advance for services that will be rendered later. The money will be recognized on the income statement during the period when services are delivered. So, a strong deferred revenue pipeline points toward consistent growth for Palo Alto.

Why the stock is still a good buy

Palo Alto Networks stock isn't cheap after its latest spike. It trades at 65 times forward earnings, which is higher than the S&P 500's forward earnings multiple of 22.2. The company's price-to-sales ratio of 10.6 also exceeds the S&P 500's multiple of 3.24, but the premium seems deserved. Palo Alto is on track to deliver strong growth thanks to the lucrative market it operates in.

The company is now dominating more market segments than ever. Research firm Gartner listed it as a leader in six cybersecurity niches in fiscal 2021 as compared to just two last year. This indicates a growing prominence in the cybersecurity market that may help it gain still more business, and is just another reason to buy this growth stock despite its rich valuation.

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

Stocks Mentioned

Palo Alto Networks Stock Quote
Palo Alto Networks
PANW
$178.40 (5.00%) $8.50

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