Premiere cybersecurity company Palo Alto Networks (PANW 0.77%) has seen significant growth in recent years, thanks in part to the increasing importance of cybersecurity in the modern world. 

With the proliferation of connected devices and the rise of the Internet of Things, the need for effective cybersecurity solutions has never been greater.

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The growing menace

The cybersecurity industry as a whole has experienced strong growth in recent years, with the Identity Theft Resource Center reporting the number of data breaches surged 68% last year (though through the third quarter of this year they were running 69% below that threshold). Even so, it still represents over 166.7 million victims. 

According to market research firm Gartner, global information security and risk management is expected to reach $188.3 billion in 2023, up from $157.7 billion in 2020. This growth can be attributed to a variety of factors, including the proliferation of remote work, a shift to cloud-based delivery models by businesses, and the increasing sophistication of cyber threats.

Despite this growth potential, however, the prospect for an economic downturn to impact cybersecurity spending is a threat, particularly early next year when many analysts and economists say the likelihood of a recession is greatest. 

In a recession, businesses may be more hesitant to invest in new technologies or expand their cybersecurity budgets. However, it is worth noting that cybersecurity is often viewed as a necessary expense rather than a luxury, so it is likely that companies will continue to allocate funds toward cybersecurity even in the face of economic challenges.

Becoming a cash-generating machine

Palo Alto Networks has seen strong growth in recent years with billings increasing by 25% in the most recent quarter to $1.6 billion. This can be attributed to the company's focus on innovation and ability to meet the evolving needs of its customers.

Chairman and CEO Nikesh Arora said Palo Alto's customers increased their commitments to its cybersecurity platform because "they are able to choose our best-of-breed capability and simplify their security architecture." He continued, "We are focused on expanding the breadth of our offerings and our pace of innovation to continue to drive share gains in the cybersecurity market."

Importantly, Palo Alto was able to increase the amount of free cash flow it generated in the quarter to $1.2 billion, or almost as much as it produced in its fiscal year that ended in July, and over 10 times more than it recorded in its year-ago fiscal first quarter. 

The next generation of cybersecurity

In addition to its strong performance in the cybersecurity market, Palo Alto Networks has also made significant strides in the software development industry. It has made a number of acquisitions in this space, including the purchase of container security specialist Twistlock and serverless security leader PureSec, which have helped enhance its capabilities in the cloud security market. This focus on software development and cloud security is likely to drive further growth for the company in the coming years.

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Next-generation security is also on fire, with annual recurring revenue surging 67% year over year and crossing the $2 billion threshold for the first time. The NGS platform combines both network and endpoint security with threat intelligence so customers don't just see the threats detected, but also get protected against them automatically while having cyberattacks prevented.  

Palo Alto Networks has also been innovating, developing a number of solutions designed to protect against advanced threats such as zero-day exploits, or attacks that take advantage of a vulnerability that does not have a fix in place, as well as targeted attacks. These solutions use artificial intelligence and machine learning to analyze network traffic and identify potential threats in real time.

Downplaying the threat

Despite Palo Alto Networks' leading position in the cybersecurity market that is seeing strong growth across its platforms, the market continues to sell down its stock, which is now off 23% for the year. 

Analysts forecast the cybersecurity expert will be able to grow earnings at 27% annually for the next five years, and they've set a one-year consensus price target on the stock of $233 per share, which implies some 65% upside from here. Palo Alto Networks has a much longer runway for growth over the next decade or more, however.

The company's strong focus on innovation and ability to make acquisitions to plug holes in its business means the stock is likely to be the beneficiary of significant growth opportunities in the coming years. While economic downturns may impact cybersecurity spending, the transition to cloud-based IT infrastructure and the importance of securing networks makes it a necessary expense for many businesses.

All of this puts Palo Alto Networks stock in the buy column.