Shares of cybersecurity provider Palo Alto Networks (PANW 0.91%) struggled recently following a guidance cut from the company in February, but analysts at Argus Research still see brighter days ahead. Argus boosted its price target on the stock to $336 on Friday, which represents a potential upside over the next 12 months or so of about 17%.
Softening demand and a change in strategy
Palo Alto saw weakness in its U.S. government-related business in its most recent quarter, with deals that were expected to close failing to do so. On top of that headwind, the company is shifting its sales strategy to pitch its platform as a way to reduce the number of vendors rather than go head-to-head with major competitors. This shift is pushing back billings and revenue recognition.
Argus isn't worried about these short-term headwinds. The stock researcher views Palo Alto as a solid player in a highly fragmented market, and Palo Alto's broad cybersecurity platform should be appealing to enterprise customers.
The generative AI opportunity
As generative AI technology advances rapidly, cybersecurity companies will need to keep up to protect their customers from the latest threats. Argus pointed to a "more toxic" cybersecurity environment created by generative AI, which bodes well for overall demand.
While Palo Alto may see stronger demand down the road, the stock certainly looks pricey. With a market capitalization of around $92 billion, Palo Alto stock trades for nearly 12 times the average analyst estimate for full-year sales. The price-to-adjusted earnings ratio is also elevated, sitting above 50.
With Palo Alto expecting to grow revenue by just 15% to 16% in fiscal 2024, those valuation metrics are tough to justify. Argus' $336 price target may be a little too optimistic.
