Several of the world's largest tech companies have reached trillion-dollar valuations over the past five years. However, none of the world's leading "pure play" cybersecurity companies have come close to joining the 12-zero club yet.
The largest one, Palo Alto Networks (PANW 0.61%), has a market cap of $80 billion. Could it keep growing and become a trillion-dollar stock by 2030? Let's review its business model, long-term catalysts, and projected growth rates to decide.
Image source: Getty Images.
A decade of robust and predictable growth
Palo Alto Networks went public at a split-adjusted price of $14 per share on July 20, 2012. Its stock now trades at about $260, so a $2,000 investment in its IPO would be worth more than $37,000 today. The same investment in an S&P 500 index fund would only have grown to about $7,900 after factoring in its reinvested dividends.
Palo Alto easily beat the market because it generated impressive and consistent growth. Between fiscal 2013 and fiscal 2023 (which ended this July), its annual revenue grew at a compound annual growth rate (CAGR) of 33%, while its net income rose at a CAGR of 57% on a non-GAAP (generally accepted accounting principles) basis. Its total number of enterprise customers grew from about 9,000 at the end of fiscal 2012 to more than 80,000 today. It also turned consistently profitable on a GAAP basis over the past five consecutive quarters as it reined in its stock-based compensation expenses.
Palo Alto Networks' first product was a next-generation firewall (NGFW) that upgraded traditional firewalls with advanced network filtering tools. That firewall formed the foundation of Strata, its suite of on-premise network security tools.
It subsequently expanded its ecosystem with Prisma, which handles its cloud-based security services; and Cortex, which houses its AI-powered threat detection tools. That expansion, which was driven by big investments and acquisitions, helped it keep pace with newer competitors like CrowdStrike, which eschews on-site appliances in favor of fully cloud-native services, and SentinelOne, which aims to completely replace human analysts with AI algorithms.
Palo Alto now refers to Prisma and Cortex as its next-generation security (NGS) services, which accounted for 43% of its annual recurring revenue (ARR) at the end of fiscal 2023. That's up from 34% of its revenue at the end of fiscal 2022.
What's next for Palo Alto Networks?
Palo Alto's revenue rose 25% in fiscal 2023 even as the macro headwinds drove many companies to rein in their spending, and it expects 18%-19% growth in fiscal 2024.
Looking further ahead, analysts believe its revenue will grow at a CAGR of 18% from fiscal 2023 to fiscal 2026 as it continues to expand its NGS services to offset the slower growth of its legacy Strata services. They also expect its GAAP net income to rise at a CAGR of 51% as it continues to reduce its stock-based compensation, make fewer acquisitions, and leverage its scale to protect its pricing power and gross margins.
The global cybersecurity market could continue to grow at a CAGR of 14% from 2023 to 2030, according to Fortune Business Insights, but the cloud and AI cybersecurity markets should grow at a much faster pace than the legacy markets. Market.us estimates the cloud security market will grow at a CAGR of 22.5% from 2022 to 2032, while Grand View Research expects the AI cybersecurity market to expand at a CAGR of 24% from 2022 to 2030.
So if Palo Alto keeps growing at CAGR of 18% from fiscal 2026 to fiscal 2030, it could potentially generate $22 billion in revenue by the final year. That would be more than three times higher than its $6.9 billion in revenue in fiscal 2023.
Palo Alto Networks won't become a trillion-dollar stock yet
Assuming Palo Alto's valuations hold steady and its stock price also triples along with its revenue, its market cap could top $240 billion by 2030. It won't join the trillion-dollar club, but it will still be the world's largest pure-play cybersecurity company.
But instead of looking at its market cap, investors should focus on its stable growth, broad diversification, scale, and rising profits. Those strengths make it a great long-term investment -- even if it seems small compared to the market's tech titans.
