Palo Alto Networks (PANW 2.11%), one of the largest cybersecurity companies in the world, went public 10 years ago at $42 per share. The stock opened at $52.20 on the first day, eventually rallied to an all-time high of $640.90 this April, and now trades just below $500.
If you had invested $1,000 in Palo Alto Networks' IPO, your initial investment would have blossomed to nearly $11,750 today. Let's look back at the rise of Palo Alto and see where it could be headed in the future.
An American company with Israeli roots
Palo Alto was founded by Nir Zuk, who was born in Israel and is a former member of Unit 8200, the electronic intelligence division of the Israel Defense Forces (IDF). At the IDF, Zuk worked under Gil Shwed, who would go on to co-found Check Point Software in 1993.
Between 1994 and 1999, Zuk worked at Check Point and helped develop its flagship firewall product. He subsequently partnered with Check Point's former VP Asheem Chandna to create a "next-gen" firewall product that would enhance traditional firewalls with network device filtering services. That partnership eventually led to the creation of Palo Alto Networks in 2005.
Expanding into a cybersecurity giant
At the time of its IPO, Palo Alto was often compared to Check Point Software because both companies developed on-site firewall products. But starting in 2014, Palo Alto made more than a dozen acquisitions to expand its ecosystem into newer and faster-growing markets.
That expansion split Palo Alto's ecosystem into three distinct platforms: Strata, which houses its on-site firewalls and network security services; Cortex, which provides AI-powered threat detection services; and Prisma, a suite of cloud-based security services. That expansion enabled Palo Alto to widen its moat against cloud-native competitors like CrowdStrike and AI-powered rivals like SentinelOne.
Today, Palo Alto refers to its cloud and AI segments as its higher-growth NGS (next-gen security) services. It generated 31% of its trailing-12 month revenue from its NGS services in its latest quarter, compared to 24% a year earlier, and that percentage will likely continue to climb.
Palo Alto's mix of organic and inorganic growth boosted its annual revenue from $255 million in fiscal 2012 to $4.3 billion in fiscal 2021, which ended last July. Analysts expect it to generate $5.5 billion in revenue in fiscal 2022, which would represent a 10-year compound annual growth rate (CAGR) of 36% from fiscal 2012. Its adjusted earnings per share (EPS) also soared from just $0.14 in fiscal 2012 to $6.14 in 2021, and analysts' expectations for $7.45 per share in fiscal 2022 would translate to a 10-year CAGR of 49%.
Palo Alto still isn't profitable on a GAAP (generally accepted accounting principles) basis yet, but it's repeatedly said that it prioritizes its long-term growth over its short-term profits. Two years ago, Nir Zuk criticized Check Point's slower growth and more profitable business model in a Globes interview, saying that he saw "no logic in Check Point losing market share and still putting its emphasis on profit." But in a CRN interview earlier this year, Zuk's former colleague Gil Shwed fired back and claimed that Check Point still provided "far better security" than Palo Alto and its other competitors.
Where is Palo Alto Networks headed?
Palo Alto has been named a market leader in Gartner's Magic Quadrant for network firewalls for 10 consecutive years, making it a "best in breed" player in a crowded market. It already serves more than 85,000 customers across over 150 countries, but it could still have plenty of room to grow as the cybersecurity market continues to expand.
Fortune Business Insights expects the global cybersecurity market to continue growing at a CAGR of 13.4% between 2021 and 2029 as cyberattacks become more frequent and complex. As one of the top names in this market, Palo Alto could grow faster than many of its industry peers.
The cybersecurity market is well insulated from inflation and other macroeconomic headwinds, since organizations generally won't lower their digital defenses just to save a few dollars. That's why analysts still expect Palo Alto's revenue to continue rising at a CAGR of nearly 25% between fiscal 2021 and fiscal 2024. They also expect it to gradually narrow its GAAP losses as it reins in its stock-based compensation expenses and makes fewer acquisitions -- and possibly even turn profitable by fiscal 2024.
Palo Alto's stock got overheated last year, but it now looks reasonably valued at 56 times its forward adjusted earnings and seven times this year's sales. By comparison, CrowdStrike and SentinelOne trade at 13 and 10 times next year's sales, respectively. Therefore, I believe Palo Alto looks like a compelling buy right now -- and it could have plenty of room to run over the next decade.