Shares of Palo Alto Networks (PANW 0.91%) have been killing it. Over the last 12-month stretch, the cybersecurity leader's stock is up over 50%, compared to a more than 7% decline for the S&P 500. After years of acquisitions, free cash flow is booming, and management provided a rosy outlook for its new fiscal year. A 3-for-1 stock split was also announced, but that's no reason to buy. This is simply a fantastic cybersecurity business firing on all cylinders right now, trading for a reasonable price. For the right investor, it's not too late to buy.
A great end to a great fiscal year
Palo Alto Networks just wrapped up its 2022 fiscal year (the 12 months ended July 2022). Fourth-quarter revenue was up 27% year over year to $1.55 billion, and full-year revenue was up 29% to $5.5 billion. Free cash flow on the year was a healthy $1.79 billion, including a 62% year-over-year increase in Q4. With a few years worth of acquisitions still early on in paying off, there's room for free cash flow to run even higher.
The balance sheet is also in tip-top shape. Cash and investments totaled $4.69 billion at the end of July, offset by convertible notes of $3.68 billion.
More importantly, Palo Alto Networks' outlook for fiscal 2023 (CEO Nikesh Arora's fifth year at the helm) calls for revenue growth of about 25% over and above 2022 to a range of $6.85 billion to $6.9 billion. Free cash flow profit margin is expected to be 33.5% to 34.5%. Based on a current enterprise value of just under $57 billion, Palo Alto Networks stock trades for 24 times expected fiscal year 2023 free cash flow.
Lots of growth runway for Palo Alto Networks
Of course, that price tag is only worth paying if you believe this cybersecurity business will continue expanding at a healthy clip for years, not just in the next year. However, there's reason to believe Palo Alto Networks has a long runway of growth ahead of it. Cybersecurity services are in high demand as organizations around the globe rapidly migrate to the cloud. This dynamic is expected to continue through the end of the 2020s. Palo Alto Networks is an industry leader and the largest company solely focused on cybersecurity (as measured by annual sales and market cap).
However, even with its scale, Palo Alto Networks management estimates the company only sops up about 6% of the total cybersecurity market it addresses. There are good reasons why the cybersecurity space is so fragmented; there's a lot of IT that requires different solutions, and redundancy is an important concept in security. Nevertheless, Arora and company think there's room to expand Palo Alto Networks' market share. Arora had this to say on the earnings call:
Despite the success so far in our transformation, we still see significant potential ahead of us. We estimate our large addressable market to be growing at a rate of 14%. At 29%, our fiscal year '22 revenue growth more than doubled this market growth rate. As we have transformed the business, we have seen our revenue growth reaccelerate.
If the company can deliver on its fiscal 2023 goals and continue expanding at about a 20% rate over the next few years -- all the while maintaining or growing those free cash flow margins -- this will be a fantastic business to own over the next decade. As is always the case with high-growth tech stocks, expect plenty of bumps in the road. But if you believe the cybersecurity industry will be in growth mode for the duration of the 2020s and have time to wait, it's not too late to buy Palo Alto Networks stock.
