Palo Alto Networks' (NASDAQ:PANW) stock has rallied more than 80% over the past 12 months and currently hovers near all-time highs.

The cybersecurity company dazzled investors by repeatedly beating Wall Street's expectations while raising its guidance over the past year, but is its stock getting too hot to handle? Let's take a fresh look at Palo Alto's growth rates and valuations to see if its stock is still worth buying.

Understanding Palo Alto's business

Palo Alto was founded in 2005, and it initially sold on-site firewall appliances to large businesses. That legacy business is still the foundation of its main security platform, Strata.

An IT professional checks a tablet in a low-lit room full of computer screens.

Image source: Getty Images.

But over the past few years, Palo Alto aggressively expanded its portfolio of AI-powered and cloud-native security services with big investments and acquisitions.

That expansion created Prisma, its suite of cloud-based security services, and Cortex, its AI-powered threat detection platform. It collectively refers to these newer businesses as its next-generation security (NGS) platforms.

Palo Alto's NGS expansion reduced its dependence on its on-site appliances, locked in more customers with sticky subscriptions, and widened its moat against cloud-native challengers like CrowdStrike. It also enabled it to keep generating robust, double-digit sales growth as older cybersecurity appliance makers lost their momentum.

How rapidly is Palo Alto growing?

At the time of its IPO in 2012, Palo Alto served just over 9,000 customers in more than 100 countries. Today, it serves over 85,000 customers in more than 150 countries.

Between fiscal 2012 and 2021 (which ended this July), its revenue soared from $255 million to $4.26 billion, representing a compound annual growth rate (CAGR) of 36.7%. But even after that massive growth spurt, Palo Alto continues to grow its billings and revenue at impressive double-digit rates:

Growth (YOY)

FY 2019

FY 2020

FY 2021

Q1 2022

Billings

22%

23%

27%

28%

Revenue

28%

18%

25%

32%

Source: Palo Alto Networks. YOY = Year-over-year.

For the full year, Palo Alto expects its billings to grow 22%-23% and for its revenue to increase 26%-27%. It expects that growth to be led by its NGS platforms, which have consistently increased their annualized recurring revenues (ARR) over the past two years:

Period

FY 2020

FY 2021

Q1 2022

NGS ARR

$650 million

$1.18 billion

$1.27 billion

Percentage of TTM revenue

19%

28%

28%

Source: Palo Alto Networks. TTM = trailing 12 months.

At the end of fiscal 2021, Palo Alto's cloud platform hosted seven modules, which were used by over three quarters of the Fortune 100. CEO Nikesh Arora said many of those customers had quickly gone from "zero to seven modules" to shield themselves from more aggressive cyberattacks.

But what about its margins and profits?

Palo Alto isn't profitable on a generally accepted accounting principles (GAAP) basis yet, due to its high stock-based compensation expenses and nearly $3 billion in acquisitions over the past two years.

But it's still profitable on a non-GAAP basis. Its non-GAAP operating margin has also stabilized after dipping sharply in fiscal 2020, while its adjusted free cash flow (FCF) margin stabilized and improved:

Period

FY 2019

FY 2020

FY 2021

Q1 2022

Non-GAAP operating margin

22%

17.6%

18.9%

18%

Adjusted FCF margin

36.7%

31.8%

32.6%

44.4%

Non-GAAP EPS growth (YOY)

30%

(10%)

26%

1%

Source: Palo Alto Networks. YOY = year-over-year.

Palo Alto doesn't plan to make any more major acquisitions in the near future, so those metrics should continue to stabilize as it focuses on expanding it NGS business with its in-house talent and technologies.

For the full year, Palo Alto expects its adjusted FCF margin to remain between 32%-33% and for its non-GAAP EPS to increase 16%-18%.

The valuations and verdict

Based on the midpoints of Palo Alto's own estimates, its stock trades at about 74 times forward earnings and eight times this year's sales.

Those valuations aren't cheap, but they make Palo Alto more reasonably valued than CrowdStrike, which trades at over 330 times forward earnings and nearly 40 times this year's sales. CrowdStrike is growing a lot faster than Palo Alto, but the gap isn't wide enough to justify its sky-high valuation.

Therefore, it isn't too late to buy Palo Alto's stock. It's a top player in the growing cybersecurity market, and its core business is naturally insulated from macroeconomic threats like rising interest rates, inflation, and even a potential recession. Simply put, it's a solid evergreen investment for a turbulent market.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.