Palo Alto Networks (PANW -3.23%) reported a string of positive quarterly financial reports this year, thanks in part to its dominance in the cybersecurity industry, where demand remains strong. As a result, shares of the company have fallen just 20.2% from their all-time high amid the broader stock market sell-off, which is a far smaller loss than many other tech giants experienced.
For context, shares of Amazon and Tesla have lost 49.6% and 56.1% of their value, respectively, from all-time highs and they're two of the most popular companies on Wall Street.
It highlights just how positive Palo Alto's performance has been in this tough economy. Here's why the stock is a buy on the dip, particularly in light of its recent 3-for-1 split, which makes it much more affordable for smaller investors.
Palo Alto is a dominant force in cybersecurity
Palo Alto Networks is a recognized leader in 13 different areas of cybersecurity across its three core business units: network security, cloud security, and security operations. But let's back up for a second, because that success stems from a landscape that changed dramatically over the last decade.
The adoption of cloud computing technology accelerated the need for cybersecurity. Once upon a time, it was sufficient for a company to install local security software to protect its digital assets, but with the onset of the cloud, now all of its operations and valuable information are hosted online. That means threats can come from ... well, anywhere in the world.
That's why Palo Alto Networks (and many of its peers in the cybersecurity industry) performed so well during the economic downturn. Investment bank Morgan Stanley recently surveyed the chief information officers at some of the largest companies in America, and the results revealed that cybersecurity was the last expense they'd be willing to cut, even in a recession.
On that note, during the first quarter of fiscal 2023 (ended Sept. 30), Palo Alto had 1,262 customers spending at least $1 million annually on its products, up 23% from 1,025 customers at the same time last year. That really highlights how quickly large organizations are flocking to adopt advanced cybersecurity tools.
A pipeline busier than ever
Remaining performance obligations (RPOs) are an important metric for investors to track, because they effectively represent the company's pipeline of work. Therefore, RPOs are eventually expected to convert into revenue, and in the first quarter, Palo Alto's RPOs hit $8.3 billion. It was a 38% increase year over year, and it represented an all-time high.
Revenue grew a little more slowly at 26%, though it came in at $1.56 billion, which was above the high end of the company's guidance. That result, and the positive quarter overall, prompted Palo Alto to marginally increase its full-year revenue forecast for fiscal 2023 to $6.91 billion at the top of the range.
The growth gap between RPOs and revenue hints that revenue could be due for an acceleration in the medium term.
But the bigger positive in the first quarter was Palo Alto's profitability on the basis of generally accepted accounting principles (GAAP). It generated $20 million in net income, which was a huge swing from its $103 million net loss during the same quarter last year. The company still prefers to use non-GAAP (adjusted) profitability as its benchmark because it excludes one-off costs like acquisitions and restructuring expenses, and it markedly increased its full-year guidance for that metric.
It now guides for up to $3.44 in adjusted earnings per share, up from its previous forecast of $3.17 just three months ago.
Palo Alto stock is a buy on the dip
As touched on earlier, Palo Alto stock is down just 21% from its all-time high, which is in stark contrast to many other big tech companies, which have lost 50% (or more) of their value. But while the dip is shallow, that should be interpreted as a positive sign: The company is doing really well.
In fact, The Wall Street Journal tracks 41 Wall Street analysts who cover Palo Alto stock, and 33 of them gave it the highest-possible buy rating. The rest are split between overweight (bullish) and neutral ratings, and not a single one recommends selling.
It's a testament to the continued demand in the cybersecurity industry as a whole, and the fact that Palo Alto is an established leader. It's one of very few companies maintaining strong growth rates and increasing guidance because several big tech companies have been slashing their forecasts this year.
Palo Alto stock trades at $168 a share as of this writing, but prior to its 3-for-1 split in September, it would have cost investors $504 for a single share. Now that the stock is far more accessible, it's much easier for people with portfolios of all sizes to participate in the company's growth.
Palo Alto Networks is in a red-hot industry, it's executing extremely well, and it has the support of the overwhelming majority of Wall Street analysts. The 20% dip in its stock price won't last forever.