At first glance, the positioning of Palo Alto Networks (PANW 0.91%) stock seems uncertain. Palo Alto attempts to tackle security challenges through a variety of tools. In comparison, companies like CrowdStrike and Zscaler tend to emphasize specific areas of cloud security.
Nonetheless, these specialty companies appear to have outperformed Palo Alto stock, though it still leads the way among other generalized cybersecurity companies. Does that make Palo Alto a leading cybersecurity stock to own? Let's take a closer look.
The state of Palo Alto Networks
It might seem like it's hard to go wrong in the cybersecurity space. Insight Partners forecasts a 16% compound annual growth rate for the industry through 2030. This factor alone increases the odds of considerable growth for the market leaders.
Still, cybersecurity is a crowded field, and understanding the competitive niches within the space is not straightforward. Even the "specialty" cybersecurity companies offer a suite of security products. During its most recent earnings call, CrowdStrike reminded investors that 63% of its customers subscribe to five or more modules.
However, Palo Alto has most explicitly promoted a multifaceted approach to cybersecurity. Whether a company needs next-generation firewalls, secure access service edge products, cloud-native application protection, or AI-driven security operations, Palo Alto likely offers the products to suit its needs.
This approach places Palo Alto in direct competition with Check Point Software Technologies and Fortinet. However, it attracted more growth over the years than these two companies. Palo Alto has a market cap of almost $110 billion versus almost $50 billion for Fortinet and nearly $20 billion for Check Point.
How Palo Alto compares
The good news for investors is the stock has performed well. Over the last year, it rose by more than 130%. This outperformed its closest competitors other than CrowdStrike.
Instead, this has led to a mixed result on the market. Regarding the price-to-sales (P/S) ratio, Palo Alto sells for about 16 times sales. This premium valuation shows that it has gained some traction. Two years ago, it was one of the lower-cost cybersecurity stocks.
At that time, only Check Point, a company with a product selection similar to Palo Alto's, traded at a lower sales multiple. Today, Palo Alto has become more expensive than all of its major competitors other than CrowdStrike and Zscaler.
PANW PS Ratio data by YCharts
Is it worth its valuation?
Palo Alto Networks draws 95% of the Fortune 100 and derives value from those relationships. Cloud adoption also continues, meaning demand for its services should continue to rise.
In the first quarter of fiscal 2024, its revenue of $1.9 billion grew 20% versus the year-ago quarter. Unfortunately, it may be hampered by competition, as revenue grew 25% in fiscal 2023. Also, it projects between 18% and 19% growth in fiscal 2024, meaning growth rates will probably continue to fall.
Moreover, revenue for CrowdStrike and Zscaler grew 35% and 40%, respectively, in their most recent quarters, showing Palo Alto continues to lag its more specialized peers.
Nonetheless, Fortinet's revenue growth in the most recent quarter was 16%, and Check Point grew revenue by only 3%. Hence, Palo Alto seems to maintain its edge over more direct competitors.
Is 2024 Palo Alto's year?
Whether 2024 becomes Palo Alto's year somewhat depends on an investor's point of view and that person's goals.
If one wants a cybersecurity stock that will likely beat the S&P 500 index, Palo Alto looks like an excellent choice. Its revenue growth is relatively rapid, and with the focus on cybersecurity, it is definitely on a bull trend. Also, it outperformed its closest peers over the last year except CrowdStrike.
However, its revenue increases continue to slow, and stock price growth seems to correlate highly with valuation. With CrowdStrike growing at a faster rate, Palo Alto could fall short of generating the highest growth in the industry again this year.
Ultimately, the market makes no guarantees on performance. But whatever happens in 2024, Palo Alto stands a high probability of delivering market-beating returns for its shareholders.
