Cybersecurity is one of the great technology trends today, and Palo Alto Networks (PANW 0.49%) is one of the most important players in the space. Rather than focusing on just one particular portion of the cybersecurity market, the company plays in every corner of the market it can. Investors need to familiarize themselves with this business, given its breadth of products and scale.
Palo Alto Networks was founded in 2005, and its first product hit the market in 2007. The company's initial claim to fame was its firewall hardware for enterprises, a physical device that stops certain cyberthreats.
From the get-go, the start-up faced some steep competition, including juggernaut Cisco Systems (CSCO -0.04%). But despite the strengths of the entrenched players, Palo Alto Networks' hardware quickly gained attention.
In 2011, research firm Gartner (IT -0.37%) officially recognized Palo Alto Networks as a leader in the firewall space. In 2022, Gartner named the company a leader for the 11th consecutive year (as of September 2024, Gartner hasn't updated the rankings).
As it's succeeded in its firewall business, Palo Alto Networks has expanded into other cybersecurity technologies, including cloud security, endpoint security, analytics, consulting, and more. Palo Alto Networks is finding success as it branches out.
As of 2024, Gartner had named Palo Alto Networks a leader in both SSE (security service edge) and SD-WAN (software-defined wide area network), making it the only SASE (secure access service edge) vendor to be named a leader in both categories.
In June 2018, Palo Alto Networks hired current CEO Nikesh Arora, an experienced executive known for acquisitions. Arora has certainly lived up to his reputation. Since he was hired, the company has made more than 15 acquisitions for a total price tag of about $4 billion. Its growth-by-acquisition strategy is part of how the company has expanded toward becoming an all-in-one cybersecurity provider.
Now, let's look at how to buy Palo Alto Networks stock and some things investors should know before deciding whether it's a good buy.
How to buy
How to buy Palo Alto Networks stock
Palo Alto Networks is a publicly traded company, which makes investing in it easy. It trades on the Nasdaq stock exchange under the stock ticker symbol PANW. Here are the steps you need to take.
Step 1: Open a brokerage account
Stocks are purchased through brokers. So, the first step to buying stocks is opening a brokerage account. Fidelity is a good option for many, but there are other good options. Some things to consider when choosing a brokerage include low fees, low account minimums, and an easy-to-navigate user interface.
Step 2: Figure out your budget
Before buying a stock, investors should decide how much they want to invest. Two considerations may guide decisions here.
First, it's a good idea to own at least 20 stocks in a diversified portfolio. With that general guideline in mind, investors should make sure they don't allocate too much of their total budget to any one stock.
Second, if an investor decides to buy a stock -- let's say, Palo Alto Networks -- they don't have to buy their entire position right away. Investors can use a strategy called dollar-cost averaging to add to their position little by little.
Dollar-Cost Averaging
Step 3: Do your research
Investors also don't have to know everything about a company before buying shares. But they do need to know enough to make an informed decision.
Essentially, investors are trying to discover how fast and by how much a company's profits can increase. It's good to research issues, such as economic trends, competition, how the company makes money, opportunities to expand into new products and services, and the potential for improving profit margins.
Step 4: Place an order
Once investors have a brokerage account, know how much they can invest, and have researched the company, they're ready to place an order. Each brokerage's user interface is a little different. Basically, investors need to navigate to the trade option and enter the ticker symbol and either how many shares they want to buy or how much money they want to invest.
Investors will notice the option to place either a market order or a limit order. A market order is the stock's price at the time of trade. However, the market price could fluctuate wildly, which motivates some investors to specify a price using a limit order. The Motley Fool generally recommends a market order.
Should I invest?
Should I invest in Palo Alto Networks?
There are multiple good reasons to consider buying Palo Alto Networks stock. It starts with the industry. These days, cybersecurity isn't a luxury -- it's a necessity. For this reason, it's one of the fastest-growing markets in the world.
Multiple research groups believe spending in the space will grow at a double-digit compound annual growth rate (CAGR) through the end of this decade. A 2022 report by McKinsey & Company suggests the total market size of cybersecurity could reach $2 trillion by 2030.
Clearly, there will be cybersecurity companies that are massive beneficiaries of this secular growth trend. Given that it's a recognized leader in multiple cybersecurity categories, it's logical to believe Palo Alto Networks can grow at an impressive rate long term. And long-term revenue growth is one of the most important factors for good investments.
For just one example of its growth potential, generative artificial intelligence (AI) is a hot trend. According to a 2023 study from Salesforce (CRM -0.37%), almost nine out of 10 information technology leaders believe generative AI will be a "prominent" tool for their business.
But a recent study from IBM (IBM 0.08%) found that only about one-quarter of generative AI projects are secure from a cybersecurity perspective. This is one reason Palo Alto Networks is seeking to establish itself as a leader in AI cybersecurity.
The company is well positioned to benefit from such trends. Given these opportunities and its leadership position, it's no wonder its revenue grew 16% year over year during its fiscal 2024, outpacing industry growth as it takes market share.
That said, there are also good reasons for some investors to avoid Palo Alto Networks stock. For starters, most investors do not understand cybersecurity technology well, so it can be hard to confidently single out a winner in this space.
It's also important to note that Palo Alto Networks has a beta of 1.1, according to Yahoo Finance. This just means the stock is generally more volatile than the overall market and prone to slightly larger swings in price. Depending on an investor's personal financial situation and goals, investing in a volatile growth stock might not be the best idea.
Beta
Finally, Palo Alto Networks' growth-by-acquisition strategy has intrinsic risks for shareholders. It's hard to integrate new businesses into the company, it's possible to overpay, and it can dilute shareholder value. For perspective, as of September 2024, Palo Alto Networks' share count was up 23% since the start of 2021.
Profitability
Is Palo Alto Networks profitable?
Investors need to understand that Palo Alto Networks ends its fiscal year in July. In other words, its earnings calendar differs from most companies.
Historically, Palo Alto Networks recorded net losses. But in fiscal 2023, the company recorded its first annual net profit, according to generally accepted accounting principles (GAAP). Then, in fiscal 2024, its profits took another big step forward, with the company earning almost $2.6 billion in net income.
Palo Alto Networks has the potential to remain profitable. Revenue for the company's subscription and support business segment is growing fast, lifting its gross profit margin, a trend that could continue.
Also, Palo Alto Networks' management recently reined in operating expenses as part of a multiyear plan. In its fiscal 2023, the company's revenue grew 25% year over year, while total operating expenses were up less than 16%. The trend continued in fiscal 2024, with revenue up 16% and operating expenses only up 15%.
This is leading to a higher operating margin, explaining its profitability. And management believes it can become even more profitable in future years.
Dividends
Does Palo Alto Networks pay a dividend?
Don't expect dividend payments from Palo Alto Networks anytime soon. The company has never paid one before, and its financial filing for its fiscal third quarter of 2024 says, "We do not intend to pay dividends for the foreseeable future."
ETF options
ETFs with exposure to Palo Alto Networks
For investors who love the idea of investing in the cybersecurity trend but don't want to pick stocks, exchange-traded funds (ETFs) could be a good option. There are many cybersecurity-themed ETFs, and many have outsize exposure to Palo Alto Networks.
For example, the First Trust Nasdaq Cybersecurity ETF (CIBR -0.11%) holds 29 stock positions as of August 2024. Palo Alto Networks stock makes up almost 9% of the total value for this basket. This gives investors significant exposure to Palo Alto Networks stock while providing exposure to the rest of the space via 28 other stocks, reducing risk if something were to go wrong for Palo Alto Networks.
Investors might also consider the Global X Cybersecurity ETF (BUG -0.74%) for a cybersecurity ETF with a slightly lower expense ratio. Its expense ratio is just 0.50% compared to 0.59% for the First Trust Nasdaq Cybersecurity ETF.
The Global X Cybersecurity ETF is a little more concentrated, with only 24 stock positions as of September 2024. But Palo Alto Networks still figures prominently in the portfolio, with an almost 7% allocation.
Stock splits
Will Palo Alto Networks stock split?
In September 2022, Palo Alto Networks had its first and only stock split. It was a 3-for-1 split, meaning investors received two additional shares for each share they already owned.
In the official press release, Palo Alto Networks' management said it split its stock because the price per share had gone up a lot since it went public. So, it could split again in the future if the price continues to climb.
It can be hard to predict upcoming stock splits. But considering management did a 3-for-1 split at around $500 per share (pre-split), it seems Palo Alto Networks wants to keep its stock price below $200 per share. If its stock price were to climb above $400 in the future, it's possible the company would do another split, perhaps a 2-for-1 split.
As of September 2024, Palo Alto Networks stock had roughly doubled since its last stock split. At this rate, it could split again in the not-so-distant future.
Related investing topics
The bottom line on Palo Alto Networks
Cybersecurity is a fertile hunting ground for good investments because of how fast the space is growing. And Palo Alto Networks is a good company to consider, given its leadership position, the breadth of its offerings, and its history of success.
As quickly as things change in the cybersecurity world, the company must keep up with the innovations of cybercriminals. But it certainly has plenty of opportunities to create long-term shareholder value.
FAQ
Investing in Palo Alto Networks FAQ
Is Palo Alto Networks stock a buy or a sell?
Investing is a personal decision, so it's impossible to definitively say whether Palo Alto Networks stock is a buy or not. The company is growing fast in a hot industry, and many financial metrics are improving, which suggests the stock could head higher. But in a highly competitive, fast-changing space, Palo Alto Networks isn't guaranteed success.
Does PANW pay a dividend?
Palo Alto Networks does not pay a dividend and doesn't plan to pay one anytime soon.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cisco Systems and Palo Alto Networks. The Motley Fool recommends Gartner and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
