Palo Alto Networks (PANW 3.26%) continues to impress. With digital security more crucial than ever, shares of the top cybersecurity pure play (as measured by revenue and market cap) are down less than 6% in 2022 with just over a month to go until the new year.

Considering that the S&P 500 index is down nearly 18% over the same time period, Palo Alto Networks has been a great stock to own during the bear market.

The most recent pop higher is a result of the company's fiscal 2023 earnings update, which was accompanied by a raise in full-year financial guidance and the announcement of a new acquisition. Cybersecurity is a secular growth trend, and this is a top way to invest in the space for the long haul. 

No recession for this top cybersecurity company

Palo Alto Networks reported a 25% year-over-year increase in revenue to $1.56 billion in its fiscal 2023 first quarter (the three months ended October 2022). Billings -- what's been invoiced to customers for payment -- increased 27% to $1.75 billion, giving a good indication of the direction this business is headed in the immediate future.

Net income was $20 million, compared to a net loss of $104 million last year. Free cash flow, which can be highly volatile from quarter to quarter, was an impressive $1.2 billion, compared to $554 million last year.

Given the great showing to kick off fiscal 2023, management updated its guidance and now expects full-year revenue of $6.85 billion to $6.91 billion, representing year-over-year growth of 25% to 26% (compared to a growth forecast of just 25% before). Adjusted free-cash-flow profit margin was also increased to a range of 34.5% to 35.5% (it was 33.5% to 34.5% before).

One downside here is that total share count is now set to rise to 325 million to 331 million shares outstanding, compared to the previous outlook for 111 million to 113 million shares outstanding. That's likely a function of Palo Alto Network's announced acquisition of Cider Security. The price tag will be $195 million in cash, plus equity awards and stock-based compensation to employees.

Palo Alto Networks had $3.8 billion in cash and short-term investments on hand at the end of October, and another $2.1 billion in long-term investments, offset by convertible debt of $3.68 billion.  

Is this acquisition a good thing?

The acquisition of Cider Security ends a hiatus in takeovers at Palo Alto Networks. A multiyear spending spree that CEO Nikesh Arora kicked off when he took over the leadership role concluded in early 2021. 

But cybersecurity needs are constantly in flux, adjusting to meet the protection needs of customers as they stave off the bad guys. Cider Security helps fill an emerging and specific need: securing the software development supply chain. 

Cider secures software while it's being developed, as well as during the crucial stage when an application is being updated. It will be highly complementary to Palo Alto Networks' new cloud-based security tools that scan for software's vulnerabilities before it gets completed and rolled out to users.

Arora and his team have been focused on increasing profitability as of late (including share buybacks to offset stock-based compensation), and another acquisition will be a short-term drag on shareholders. That's particularly the case because of the expected increase in share count, since it will lower free cash flow per share. Nevertheless, Palo Alto Networks is expanding at a brisk pace, and security innovation and aggressive takeovers of small peers are required to keep that expansion going. 

It's worth keeping an eye on the share count and how it dilutes results this year. Nevertheless, Palo Alto Networks' success at generating shareholder value under Arora has been impressive since he took over in mid-2018.

PANW Free Cash Flow Per Share Chart

Data by YCharts.

The good news is that the takeover of Cider Security doesn't alter management's focus on driving profitable growth. Investors need not expect another string of expensive acquisitions like a few years ago, and the company generates ample free cash flow to continue repurchasing stock.

Shares currently trade for just under 22 times trailing-12-month free cash flow. The company remains the top dog in the cybersecurity market for good reason. With cybersecurity and cloud computing growth in high gear, I like its chances of reaching Arora's goal to be the first cybersecurity business with a $100 billion market cap (double the current size) in the next few years.