Palo Alto Networks (PANW 4.19%) made news thanks to a 3-for-1 stock split on Sept. 13, but there is more to the company than just the stock split.
For starters, Palo Alto has been growing at an impressive pace consistently over the past few years, driven by growth in cybersecurity spending, the company's impressive market share, and its acquisition-based growth strategy. Not surprisingly, Palo Alto's market capitalization has grown at a healthy pace since it made its stock market debut a decade ago.
PANW Market Cap data by YCharts
Palo Alto currently has a market cap of just over $52 billion, which is a massive increase from around $4 billion a decade ago. So the company is a long, long way from hitting a $1 trillion market cap right now. But thanks to its terrific growth and the secular opportunity in the cybersecurity market, it wouldn't be surprising to see Palo Alto become a trillion-dollar stock in the long run. But can the company hit that milestone by 2035? Let's find out.
Palo Alto Networks' outstanding growth is here to stay
Palo Alto Networks finished its latest fiscal year with $5.5 billion in revenue. That's a jump of 21x when compared to the company's fiscal 2012 revenue of $255 million. It is worth noting that global cybersecurity spending stood at $60 billion in 2012, according to Gartner. That figure is expected to hit $172 billion in 2022.
So Palo Alto Networks has grown at a faster pace than the market it operates in over the past decade. More specifically, Palo Alto management pointed out in the company's fiscal Q4 2022 presentation that its revenue is growing at twice the pace of its total addressable market (TAM).
This can be attributed to Palo Alto's solid share in fast-growing cybersecurity niches such as virtual firewalls and cloud security. Global cybersecurity spending is expected to exceed $1 trillion a year by 2035, according to the World Economic Forum. So Palo Alto's end-market opportunity is set to grow at a faster pace over the next 13 years compared to the past decade.
The cybersecurity specialist is well placed to grow at a faster pace than the overall market over the next decade or so. That's because the company has been attracting more customers, gaining a bigger share of their wallets, and is aggressively rolling out new products to capitalize on the end-market opportunity.
In fiscal 2022, for instance, Palo Alto released 49 new major products. That was a big increase compared to 22 new major products released in fiscal 2020 and 29 new ones in fiscal 2021. The addition of new products is helping Palo Alto secure its long-term growth.
The company points out that it is the market leader in 11 cybersecurity categories. In the virtual firewall market, for instance, Palo Alto had 34.5% share at the end of 2021, an increase of 6.1 percentage points over the prior-year period. Its share of firewall appliances stood at 27% at the end of last year, up from 21.7% at the end of the previous year. Palo Alto's solid share of this market bodes well for the company's future, as the global next-generation firewall market is expected to be worth $9.6 billion in 2027, compared to $4.4 billion last year.
The combination of solid market share and end-market growth also reflects in the increase in customer spending on Palo Alto's offerings. For instance, the number of customers who spent more than $1 million in bookings in the trailing 12 months on Palo Alto's offerings increased nearly 26% year-over-year in the fourth quarter of fiscal 2022.
The company's remaining performance obligations, which refers to the total value of customer contracts signed yet to be fulfilled, jumped 40% year-over-year last quarter to $8.2 billion. For comparison, Palo Alto anticipates $6.85 billion to $6.90 billion in revenue this year, an increase of 25% over last year, which means that the company has solid revenue visibility going forward.
Can it become a trillion-dollar company?
Analysts expect Palo Alto's earnings to increase at an annual pace of 26% for the next five years, which would be an improvement over the 17% annual growth it has clocked over the last five. However, the catalysts discussed above indicate that Palo Alto could sustain such levels of growth for a longer period, though there is a possibility that it may grow at a faster pace thanks to the booming cybersecurity opportunity.
Palo Alto delivered $7.56 per share in adjusted earnings in fiscal 2022, which ended on July 31, which translates into $2.52 per share after accounting for the stock split. Applying a 26% annual growth rate to the latest fiscal year's earnings would lead us to adjusted earnings of $50.84 per share in fiscal 2035. Multiplying that by Palo Alto's five-year average forward earnings multiple of 49 would translate into a stock price of nearly $2,500.
Palo Alto stock was trading at around $175 recently, which means that the stock could multiply 14 times in 13 years at the assumed rate of earnings growth. Multiplying the company's current market cap of $52 billion by that number suggests that Palo Alto's market capitalization in 2035 could be around $730 billion.
While that would still be short of the $1 trillion milestone, investors shouldn't forget that it would still be a huge increase over where the company is right now. As such, Palo Alto Networks looks like a top cybersecurity stock that investors may want to buy right now and keep holding for a long, long time.
