Palo Alto Networks' (PANW 1.37%) stock price jumped 8% during after-hours trading on Aug. 22 following the release of its fourth-quarter report. The cybersecurity company's revenue rose 27% year over year to $1.55 billion, which beat analysts' estimates by $10 million. Its adjusted net income grew 57% to $254 million, or $2.39 per share, which also cleared the consensus forecast by 11 cents.
Those numbers looked solid, but should investors still buy this stock after it rallied more than 40% over the past 12 months? Let's review four reasons to buy Palo Alto -- and one reason to sell it -- to decide.
Image source: Getty Images.
1. Double-digit billings and revenue growth
Palo Alto's revenue growth decelerated slightly in the fourth quarter of fiscal 2022, but its growth in billings -- which gauges its underlying orders -- has accelerated for three straight quarters.
|
Period |
Q4 2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
|---|---|---|---|---|---|
|
Billings Growth (YOY) |
34% |
28% |
32% |
40% |
44% |
|
Revenue Growth (YOY) |
28% |
32% |
30% |
29% |
27% |
Data source: Palo Alto Networks. YOY = Year over year.
Palo Alto expects its billings to rise 22%-23% year over year in the first quarter of fiscal 2023, and to grow 20%-21% for the full year. It expects its revenue to rise 23%-25% in the first quarter and to increase about 25% for the full year. Its first-quarter revenue guidance matched Wall Street's expectations, while its full-year revenue guidance topped expectations for 23% growth.
Palo Alto's remaining performance obligations (RPO), or the future revenue it expects to recognize from its existing contracts, also increased 40% year over year to $8.2 billion, which suggests it will easily generate double-digit billings and revenue growth for the foreseeable future.
2. The ongoing expansion of its NGS services
Palo Alto's ecosystem consists of three main businesses: Strata, which houses its on-site firewall and networking services; Prisma, its cloud-based security platform; and Cortex, its AI-powered threat detection platform. To reduce its dependence on Strata's slower-growth legacy services, Palo Alto aggressively expanded Prisma and Cortex, which it dubs its NGS (next-generation security) services, with big acquisitions and investments over the past few years.
As a result, the annual recurring revenue from its NGS segment rose 60% year over year to $1.9 billion, or 35% of its top line, in fiscal 2022. That percentage has been steadily climbing and reducing its dependence on its legacy services.
|
Period |
Q4 2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
|---|---|---|---|---|---|
|
NGS ARR |
$1.18 billion |
$1.27 billion |
$1.43 billion |
$1.61 billion |
$1.90 billion |
|
Percentage of TTM Revenue |
28% |
28% |
29% |
31% |
35% |
Data source: Palo Alto Networks. TTM = Trailing 12 months.
Palo Alto expects its annual recurring NGS revenue to increase at least 37% to $2.6 billion, or about 38% of its total revenue, in fiscal 2023. That ongoing expansion should widen its moat against cloud-based challengers like CrowdStrike (CRWD 0.14%) and Zscaler (ZS 0.01%), as well as AI-powered newcomers like SentinelOne (S -0.10%).
3. Expanding margins and rising profits
Palo Alto's non-GAAP (generally accepted accounting principles) operating margin and adjusted free cash flow (FCF) margin both expanded sequentially and year over year in the fourth quarter as the growth of its higher-margin businesses offset its inflationary and supply chain headwinds. Its non-GAAP EPS growth also accelerated for the third straight quarter.
|
Period |
Q4 2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
|---|---|---|---|---|---|
|
Non-GAAP Operating Margin |
17.5% |
18% |
18.4% |
18.2% |
20.8% |
|
Adjusted FCF Margin |
24.5% |
44.4% |
33.5% |
25.3% |
31.2% |
|
Non-GAAP EPS Growth (YOY) |
8% |
1% |
20% |
30% |
49% |
Data source: Palo Alto Networks. YOY = Year over year.
Palo Alto expects its non-GAAP EPS to grow 24%-26% year over year in both the first quarter of fiscal 2023 and for the full year. It also expects its adjusted FCF margin to expand slightly, from 33% in fiscal 2022 to 33.5%-34.5% in fiscal 2023, as it makes fewer large acquisitions.
Palo Alto also generated a slim GAAP profit in the fourth quarter, and it expects to remain profitable on a GAAP basis throughout fiscal 2023. That milestone would set it apart from GAAP-unprofitable cybersecurity companies like CrowdStrike, Zscaler, and SentinelOne.
4. Its upcoming stock split
Lastly, Palo Alto's board approved a three-for-one stock split, which will occur on Sept. 13. That split won't change its fundamentals or its market valuation, but it could attract the attention of smaller retail investors who were hesitant to pay over $500 for a single share.
The one reason to sell Palo Alto: its valuation
Palo Alto's business is firing on all cylinders, but a lot of optimism is already baked into its stock price. At $550 a share, Palo Alto trades at 58 times its adjusted EPS estimate for fiscal 2023. That still makes it cheaper than CrowdStrike or Zscaler, which both trade at more than 160 times their forward adjusted earnings, but it's a bit pricey relative to other tech stocks.
But as a long-term Palo Alto investor, I believe this well-run company deserves that premium valuation. Its stock could remain volatile in this choppy market, but I believe it still remains one of the best long-term plays on the secular expansion of the cybersecurity sector.
