Shares of Palo Alto Networks (PANW -1.22%) have been surging of late thanks to a fiscal 2022 second-quarter earnings report released on Feb. 22 that exceeded company guidance and crushed Wall Street's expectations.
Palo Alto stock has been up 12% since its results came out, which is a relief to investors. The stock had been dealing with the broader market sell-off for much of the past year. Going forward, it won't be surprising to see the cybersecurity specialist defy the stock market correction and head higher, as the crisis in Europe is likely to increase demand for its product offerings. Let's see why.
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Higher cybersecurity spending will be a tailwind
Gartner estimates cybersecurity spending will increase from $155 billion in 2021 to $172 billion in 2022. The war in Ukraine could lead to an increase in the number and frequency of cyberattacks, according to cybersecurity experts. As a result, global banks and other organizations are ramping up their cybersecurity measures to look for threats within their systems and may actually be spending more than Gartner estimates. This is not surprising, as sources quoted by the New York Post indicate that Russia's cyberattacks against the U.S. are increasing.
These organizations and banks can turn toward the likes of Palo Alto Networks to shore up their defenses and ward off any possible cyberattacks. The cybersecurity specialist provides a range of solutions to protect data centers and the cloud, among others. As it turns out, Palo Alto Networks is the top-ranked security appliance vendor globally, with a market share of 18.9% in Q2 2021. It is worth noting that its share has increased impressively over the years, as Palo Alto controlled just 4.3% of this market at the beginning of 2013.
On the other hand, Palo Alto Networks is in a solid position to tap into the expanding cloud security market. CEO Nikesh Arora told investors in November 2021 that the company is 18 to 24 months ahead of its rivals in cloud security, which bodes well for Palo Alto as this market is expected to hit $68 billion in revenue by 2025 compared to $34 billion in 2020.
In all, Palo Alto Networks holds a robust position in the cybersecurity market, and it's expected to grow at an impressive pace over the long run. The company is already benefiting from the lucrative market it operates in, and the recent developments in Europe could give its growth a push.
Palo Alto Networks' growth could switch into a higher gear
Palo Alto Networks is already growing at an impressive pace. Its Q2 revenue was up 30% year over year to $1.3 billion, while its non-GAAP (adjusted) net income jumped to $1.74 per share from $1.55 per share a year ago. The company's original guidance had called for revenue of $1.27 billion and earnings between $1.63 and $1.66 per share, while Wall Street was looking for $1.64 per share in earnings on $1.28 billion in revenue.
For the third quarter, Palo Alto expects revenue to jump 26% year over year to $1.35 billion. Non-GAAP net income is expected to land between $1.65 and $1.68 per share. The company has also increased its full-year forecast and now expects revenue growth of 28% to $5.45 billion compared to the prior expectation of 26.5% growth. Adjusted earnings are expected to range between $7.23 and $7.30 per share compared to the earlier estimate of $7.15 to $7.25 per share.
For a few simple reasons, it won't be surprising to see Palo Alto outpace expectations as the year progresses.
First, the company's remaining performance obligations -- which measures the total value of customer contracts for which services haven't been provided yet -- increased 36% year over year to $6.3 billion last quarter, outpacing the company's actual revenue growth. It is worth noting that these obligations are worth more than Palo Alto's trailing-12-month revenue of $4.86 billion, which means that the company has built a strong revenue pipeline that should help it sustain its impressive growth.
Second, Palo Alto customers are increasing their spending on its services. The company had 1,077 active millionaire customers -- who have booked at least $1 million worth of Palo Alto's services over the past four quarters -- at the end of Q2, up 26% from the prior-year period.
Third, Palo Alto is set to bolster its cybersecurity portfolio aggressively this year. The company has released 22 major products in the first half of the current fiscal year. For comparison, it had 29 major releases throughout fiscal 2021. The release of new products should help Palo Alto attract new customers into its fold and help the company increase cross-selling opportunities and encourage existing customers to spend more money.
Is the stock still a good bet?
Palo Alto Networks' stock is richly valued. It is trading at 10.7 times sales, well above the S&P 500's price-to-sales ratio of 2.9. Its forward earnings multiple stands at 82.
2022 has been a bad year so far for expensive tech stocks, which have witnessed a correction due to various factors such as potential interest rate hikes by the Federal Reserve, surging inflation, and now the geopolitical tensions in Europe. Palo Alto, however, could defy the broader market correction since it operates in a critical area that seems built for growth. That's why investors looking to buy a top cybersecurity stock and willing to pay a premium valuation for the same should take a closer look at Palo Alto Networks.
