Palo Alto Networks (PANW 0.91%) is a global leader in cybersecurity, and it estimates cybercrime will cause $8 trillion worth of damage this year. As a result, cybersecurity has become a crucial investment for every company operating online in any capacity.
Palo Alto believes the future of protection rests with artificial intelligence (AI) because it can identify threats and respond autonomously. So the company is weaving the technology through its entire product portfolio.
It just reported results for its fiscal 2023 (ended July 31), showing it continues to grow rapidly -- and it's also profitable now, too, which sets it apart from most of its competitors. The Wall Street Journal tracks 42 analysts covering Palo Alto Networks stock, and 78% of them have given it the highest-possible buy rating.
Here's why investors should follow their lead.
Palo Alto is transforming cybersecurity
In its recent earnings call with investors, management revealed a trove of information about how cyber threats have evolved in recent years. In 2021, it would take 44 days for a cyber attacker to steal a company's data following a successful breach of its network. That number shrank to 30 days in 2022, and today, it takes just hours.
As a result, malicious actors are now striking faster than companies can respond. Palo Alto estimates that 93% of security operations centers still rely on manual processes, which are far too slow. In fact, the workload is so large, it says, that up to 23% of security alerts are ignored and never investigated.
The company offers protection in three core segments: cloud security, network security, and security operations. During fiscal 2023, it released 74 new products, five times the number it released in 2019. It came on the back of a $1.6 billion investment in research and development for the year, and a greater amount will likely be focused on artificial intelligence in the future.
The company uses AI in all three of its core product segments, placing the technology into 35 different products (and growing). Data is key. Cybersecurity providers with the most customers, harvesting the most data, will likely develop the most-accurate AI models.
Palo Alto says it collects 4.8 petabytes (4,800 terabytes) worth of data every single day, with sensors it has installed with more than 48,000 customers. The company uses this to train precision AI models, which provide automated incident response, and generative AI models, which enable customers to interact with their cybersecurity software to quickly narrow down threats.
Ultimately, Palo Alto wants to lean on its product team of 4,400 employees (including 150 AI experts) to become an AI-first company. It says this opportunity is worth a staggering $210 billion, and as an industry leader, it's primed to capture a sizable share of the pie.
Revenue and earnings are growing rapidly
Palo Alto has always operated under a "build and buy" strategy, which means it develops new products in-house while simultaneously hunting for new acquisitions to accelerate its growth. This has driven enormous value for shareholders over the last five years with a tripling of its stock price.
That came on the back of strong revenue growth; in fiscal 2023, Palo Alto delivered $6.8 billion in sales, a 25% increase year over year.
But the effort to dominate the cybersecurity industry came at a price. The company was sacrificing profitability and generated consistent net losses each year on the basis of generally accepted accounting principles (GAAP).
But the tide turned in fiscal 2023. Palo Alto carefully managed its expenses to navigate this tough economy, with its high inflation and rising interest rates, and wound up generating $1.28 in earnings per share.
On an adjusted basis -- which strips out one-off and non-cash expenses like stock-based compensation -- its result was even more impressive. It delivered $4.44 in adjusted earnings per share, a gain of 76% over fiscal 2022.
Wall Street is overwhelmingly bullish on the stock
Palo Alto Networks stock surged 11% immediately following the release of its fiscal 2023 report. Its revenue growth, profitability, and detailed AI strategy all played a hand in impressing investors.
As I touched on at the top, Wall Street is extremely bullish on this company's prospects; 33 out of the 42 analysts tracked by The Wall Street Journal have given the stock the highest-possible buy rating. Five are in the overweight (bullish) camp, while four recommend holding. Not one single analyst recommends selling.
The Street-high price target for Palo Alto stock is $305, which implies it could soar another 31% from here. Considering it's already trading near an all-time high, it speaks volumes about Wall Street's impression of the company's ability to continue executing.
Looking to the future, Palo Alto has plenty of revenue in the pipeline. Its remaining performance obligations grew by 30% in fiscal 2023 to $10.6 billion, which implies an acceleration in revenue growth might be in the cards in the next year or two.
Cybersecurity software will likely remain in high demand for a long time to come, and Palo Alto Networks is a best-in-class provider, which makes it a great place for investors to put their money.
