Palo Alto Networks (PANW 1.37%) stock has rallied impressively on the market this year with gains of nearly 20% as of this writing, and it looks as if the cybersecurity specialist's rally is here to stay following its fiscal 2023 second-quarter results (for the three months ended Jan. 31, 2023), which were released on Feb. 21.
Palo Alto's revenue and earnings jumped nicely last quarter, helping the company easily crush Wall Street's expectations. What's more, the company's earnings forecast for the current quarter is well ahead of consensus estimates. Palo Alto has also raised its billings and earnings-per-share estimate for fiscal 2023. Let's take a closer look at Palo Alto's numbers and see why it could deliver more upside as the year progresses.
Palo Alto Networks' terrific growth seems sustainable
Palo Alto's fiscal Q2 revenue increased 26% year over year (YOY) to $1.7 billion, beating the $1.65 billion consensus estimate. The company's non-GAAP (adjusted) earnings shot up an impressive 81% over the prior year to $1.05 per share, while analysts would have settled for $0.78 per share. Palo Alto also reported a GAAP profit of $0.25 per share as compared to a loss of $0.32 per share in the year-ago quarter.
The company's healthy growth was driven by the strong demand for cybersecurity products that led to a nice jump in the number of high-value transactions, along with an improvement in transaction sizes. For instance, Palo Alto witnessed a 19% YOY increase in the number of $1 million-plus deals last quarter, and the value of these transactions increased at a much higher rate of 59%.
It is also worth noting that the number of $10 million-plus transactions increased by a whopping 144%. The value of these transactions also increased at a much faster pace of 196% YOY. The health of Palo Alto's business is also evident from the growth in the company's remaining performance obligations (RPO), which increased 39% over the prior-year period to $8.8 billion.
This metric measures the total value of customer contracts yet to be fulfilled by Palo Alto. The fact that this metric grew faster than the company's revenue means that the company has built a healthy cybersecurity pipeline that should help it sustain its solid growth. Palo Alto expects $6.85 billion to $6.91 billion in revenue this fiscal year, so the company's RPO is well above its forecast for the year.
A big reason Palo Alto has been clocking such eye-popping growth is the cybersecurity market's bright prospects. Gartner forecasts an 11.3% increase in cybersecurity spending this year to $188.3 billion, which would be an improvement over last year's growth of 7.2%. The research firm believes that the adoption of hybrid work and an increase in the use of cloud computing are two reasons cybersecurity spending is set to grow faster this year.
The good part is that Palo Alto has been taking steps to make the most of the lucrative end market in which it operates. The company has released 35 new major products in the first half of 2023, a big jump of 59% over the prior year.
Palo Alto's aggressive product development moves have helped it become a dominant player in fast-growing cybersecurity niches such as software-based firewalls, a market that's expected to clock nearly 21% annual growth through 2030 and generate over $25 billion in annual revenue. More specifically, Palo Alto leads this space with a market share that's three times that of its closest competitor.
All this explains why analysts are upbeat about Palo Alto's prospects.
PANW EPS Estimates for Current Fiscal Year data by YCharts
Additionally, Palo Alto is expected to clock an annual earnings growth rate of almost 28% for the next five years.
Is the stock still a buy?
Palo Alto Networks stock is trading at 9.7 times sales and 52 times forward earnings. Those are expensive multiples compared to the S&P 500's sales multiple of 2.3 and earnings multiple of 18.3. But it is also worth noting that Palo Alto's sales and forward earnings multiples are in line with the five-year averages.
Given that Palo Alto's earnings are expected to grow faster in the next five years compared to the 18% annual growth it clocked in the last five years, investors looking to buy a high-growth cybersecurity stock can still consider going long. After all, Palo Alto Networks seems capable of justifying its premium valuation thanks to a solid revenue pipeline, potential earnings growth, and the prospects of the industry it operates in.
