Shares of cybersecurity-software pure-play leader Palo Alto Networks (PANW 1.12%) are volatile following the latest earnings update. The latest financials weren't bad, but some investors are nervous that PANW management's new, aggressive plan to consolidate cybersecurity market share to itself poses unforeseen risks. Even cloud-native cyber software peer Zscaler stopped just short of a name drop of PANW in its latest earnings call, saying that its competitor's attack won't work.

Of course, another way of looking at PANW's recent action is simply that the stock price was getting a bit frothy in the month leading up to the last update and has less to do with Wall Street's "worries."

At any rate, what is Palo Alto Networks planning, and is the stock a buy right now?

PANW "activating its AI leadership" in 2024

PANW has been around for a long time. Its existence pre-dates the current cloud-computing era, back to the days when enterprise-network security was all that mattered. Despite its large size, the company stayed more than relevant, especially under CEO Nikesh Arora. Upon taking over in 2018, Arora set out on an aggressive acquisition spree to get PANW back on track for what has since been a mass migration to cloud-based computing (use of a public data center accessed via the public internet).

Importantly, PANW ranks today as a top player in secure access service edge (SASE) cybersecurity, a convergence between old hardware-based network security of the past with modern cloud software-based security of today. Zscaler, whose co-founder and CEO Jay Chaudhry frequently spars with Arora's statements on earnings calls (mentioned at the outset), offers a secure service edge (SSE) platform geared more toward the "cloud only" versus SASE's ability to cover all parts of an IT operation. PANW ranks highly as an SSE provider as well.

That tech explanation aside, Arora is ready to go on the offensive again in 2024. For at least the next year, a new go-to-market strategy will result in lower revenue growth, perhaps a low-teens percentage rate of increase instead of the high-teens to 20% growth the company has been reporting the last few years. Arora explained the change in growth on the conference call:

Our guidance is a consequence of us driving a shift in our strategy in wanting to accelerate both our platformization and consolidation and activating our AI leadership. We believe this is the time for us to invest, given our leadership position in the market and our leadership position across platformization and consolidation.

In other words, PANW will be offering customers the installation and use of its products for free until their existing cybersecurity contracts expire. Thus, the (temporary, in Arora's estimation) dip in growth for the year to a year-and-a-half ahead. PANW believes it can be successful in this strategy, given the breadth and depth of its technology portfolio, including new AI-powered tools that many of its competitors lack.

The stock valuation is high but how high?

It remains to be seen if Arora and company can pull this off. But there were similar doubts when the CEO took the reins of the business back in 2018. As it knocked down hurdles and made new milestones along the way, the stock quickly and steadily chugged higher. I believe something similar will occur this go-around too.

Of course, PANW stock trades for a hefty premium at this point. I believe this is the simplest reason for the recent post-earnings pullback, more than doubts about the company's ability to consolidate cybersecurity market share. However, even after the pullback, shares trade for about 55 times current-year expected earnings per share and about 32 times expected current year free cash flow.

This is near the high end of PANW's valuation over the last five years, especially on a free-cash-flow basis. Keep that in mind when deciding how to proceed, as a high valuation can cause some very wild swings in stock price. But also bear in mind that a high valuation hasn't prevented PANW stock from continuing to grind its way higher, at least not up until this point.

I've been a PANW shareholder since Arora took over, and I'm happy to continue holding in 2024 and beyond as the company attempts to flex its muscles and take more share of the hotly competitive cybersecurity industry.