Up 50% in 2023, Is Palo Alto Networks Stock Still a Buy Now?

After yet another exceptional financial update, shares of Palo Alto Networks (PANW 0.11%) are up a whopping 50% so far in 2023. The cybersecurity pure-play leader has some lofty goals and keeps meeting and exceeding them, as industries of all kinds are in need of PANW's software. 

Nevertheless, with the stock price rising rapidly as of late, shares are fetching an increasingly "expensive" premium. Is it too late to buy Palo Alto Networks stock now? 

Cybersecurity soars past recession fears

As was the case late last year, the story in 2023 remains one of slowing economic growth and fears of recession. Resources, particularly of the financial variety, are being conserved by many businesses in anticipation of tough times. But cybersecurity remains in high-growth mode. 

Palo Alto Networks just proved it. Third quarter fiscal 2023 (the three months ended in April) revenue increased 24% year over year to $1.7 billion, driven once again by its "next-gen" software-based security offerings. With three-quarters of the current fiscal year down, Palo Alto has reported revenue growth of 25% to $4.9 billion.  

This builds on an impressive run that started even before the pandemic-fueled boom, as organizations began migrating en masse to cloud computing and adopting new security tools along the way. 

Data source: Palo Alto Networks.

Clearly, cybersecurity has been a secular growth trend, and PANW has been helping lead the charge higher. It remains far and away the top dog in this space, beating Fortinet and Crowdstrike Holdings in terms of total revenue and market cap. 

Data by YCharts.

How long can Palo Alto Networks sustain growth?

The question now becomes a matter of how long can PANW sustain its rate of expansion? It's already a big business -- can it really keep growing at a north-of-20% revenue clip?

Perhaps it can. Tech-titan Microsoft revealed earlier this year it generated $20 billion in annualized cybersecurity sales, double the amount in 2020.

Of course, Microsoft has the benefit of distribution, with Windows installed on billions of devices around the world. Its cloud infrastructure service Azure also is one of the largest around.

But Palo Alto Networks is more than holding its own. The company reported a 38% increase in deferred revenue (money collected for services that have yet to be provided) to $8.1 billion. This helps underpin management's guidance for 25% to 27% year-over-year growth in the final quarter of fiscal 2023 and could be an indication of momentum carryover into 2024.

Key to its growth are the numerous software-based offerings (lumped into the "next-gen security" tag) that PANW has. Customers are looking for simplicity and asset-light services they can pay for over time. With its software offerings still growing at a blistering pace (annualized revenue grew 60% last quarter), Palo Alto Networks looks like it will remain a high-growth player in cybersecurity for the foreseeable future.

Image source: Palo Alto Networks.

Is the stock a buy?

After the recent run-up in stock price, Palo Alto Networks trades for 25 times trailing-12-month free cash flow. Employee stock-based compensation remains high ($871 million so far this fiscal year) but is decreasing as a percentage of revenue. Share repurchases to offset stock-based compensation were on hold this last quarter.

Also of note, the balance sheet is about to look a bit different. In July, half of PANW's convertible debt of $3.68 billion will be paid off with cash and equivalents on balance, with the balance paid off in issuance of new shares (which has already been accounted for in guidance). Once this event is complete, this will be a debt-free company. PANW had nearly $4 billion in cash and short-term investments on balance at the end of April and another $2.7 billion in long-term investments.

This cybersecurity leader still looks reasonably priced on a free-cash-flow basis, though it isn't the value it was at the start of this year. I'm not adding to my existing position at this juncture, given the blistering pace of the share-price appreciation this year. However, this remains a company you should keep tabs on if you think the cybersecurity market will remain in high-growth mode in the years ahead.