Investors could hardly be more optimistic about Palo Alto Networks' (PANW 0.91%) stock right now. The company is exposed to several potentially game-changing niches, including artificial intelligence, cybersecurity, and software-as-a-service selling. It's encouraging growth results through early 2023 suggest that these factors might help it post market-beating sales gains even as it elevates its profit margins over the next several years.
With that potential in mind, let's take a closer look at the core reasons Wall Street is so excited about this growth stock today.
1. Back in black
Before fiscal 2022, it had been four years since Palo Alto Networks had achieved a full year of positive profits. Investors will be happy to hear that the company is determined to keep its young earnings streak alive. An intense focus on reducing costs has allowed operating income to rise to $134 million over the first nine months of fiscal 2023, compared with a $200 million loss a year earlier .
Success here bolstered management's goal of maintaining annual profitability far into the future. It also gives the company more flexibility when it chooses to invest in high-return growth initiatives like artificial intelligence. In other words, there are many ways in which investors can benefit from Palo Alto Networks' new feature of sustainable profitability.
2. Growing the base
It's usually a good sign when a management team upgrades its sales and earnings outlook, and that's especially true during choppy economic times like these. Palo Alto in late May said it now expects to boost billings by as much as 25% this fiscal year, up from the prior target of between 22% and 23%.
The earnings picture brightened even more. Robust demand for cybersecurity services in a tight spending environment has earnings on track to reach between $4.25 and $4.29 per share, up from the previous forecast of between $3.97 and $4.03.
The business is becoming more efficient as it grows and as sales tilt more toward higher contract values from larger enterprises. That's one reason investors are hoping to see further sales and earnings upgrades when Palo Alto announces its fiscal Q4 results in late August.
3. The price is right
Given the stock's 70%-plus rise through late July, you might think the best investor returns have already come and gone with this stock. But Palo Alto Networks doesn't seem prohibitively expensive right now. Sure, its price-to-sales ratio of about 12 seems high compared with the P/S ratio of around 8 from earlier in the year. But the valuation is on par with what investors are seeing in other parts of the high-growth tech world, including Microsoft.
Microsoft shares would deliver much higher profitability, cash flow, and a more diversified sales footprint. If you're interested in buying a software specialist with more focus on cybersecurity, though, and with a bright long-term outlook on growth and earnings improvements, then you should consider adding Palo Alto Networks to your watchlist.
