Palo Alto Networks‘ (NASDAQ: PANW) the stock has climbed over 80% in the past 12 months and is currently near all-time highs.
The cybersecurity firm has dazzled investors by repeatedly beating Wall Street expectations while upping its forecast over the past year, but is its stock getting too hot to handle? Let’s take a fresh look at Palo Alto’s growth rates and valuations to see if its stock is still worth buying.
Understanding the activity of Palo Alto
Palo Alto was founded in 2005 and initially sold on-premise firewall appliances to large corporations. This legacy business is still the foundation of its primary security platform, Strata.
Image source: Getty Images.
But in recent years, Palo Alto has significantly expanded its portfolio of cloud-native AI-based security services with significant investments and acquisitions.
This expansion created Prisma, its suite of cloud-based security services, and Cortex, its AI-based threat detection platform. It collectively refers to these new companies as its Next Generation Security Platforms (NGS).
Palo Alto’s NGS expansion has reduced its reliance on its on-premises appliances, blocked more customers with persistent subscriptions, and widened its gap against cloud-native challengers like CrowdStrike. It also allowed it to continue to generate robust double-digit sales growth as the old cybersecurity device makers lost momentum.
How fast is Palo Alto growing?
At the time of its IPO in 2012, Palo Alto served just over 9,000 clients in over 100 countries. Today, it serves more than 85,000 customers in more than 150 countries.
Between fiscal 2012 and 2021 (which ended in July), its revenue increased from $ 255 million to $ 4.26 billion, representing a compound annual growth rate (CAGR) of 36.7%. But even after this massive growth spurt, Palo Alto continues to increase billings and revenues at impressive double-digit rates:
Fiscal year 2021
Source: Palo Alto Networks. YOY = Year after year.
For the full year, Palo Alto expects its billing to increase 22% to 23% and revenue to increase 26% to 27%. It expects growth to be driven by its NGS platforms, which have steadily increased their annualized recurring revenue (ARR) over the past two years:
Fiscal year 2021
$ 650 million
$ 1.18 billion
$ 1.27 billion
Percentage of TTM turnover
Source: Palo Alto Networks. TTM = 12 rolling months.
At the end of fiscal 2021, Palo Alto’s cloud platform hosted seven modules, which were used by more than three-quarters of Fortune 100 companies. CEO Nikesh Arora said many of those customers had quickly gone from “ zero to seven modules ”to protect against more aggressive cyber attacks.
But what about its margins and profits?
Palo Alto is not yet profitable on a Generally Accepted Accounting Principles (GAAP) basis, due to its high stock-based compensation expense and nearly $ 3 billion in acquisitions over the past two years .
But it’s still profitable on a non-GAAP basis. Its non-GAAP operating margin also stabilized after falling sharply in fiscal 2020, while its adjusted Free Cash Flow (FCF) margin stabilized and improved:
Fiscal year 2021
Non-GAAP operating margin
Adjusted FCF margin
Non-GAAP EPS Growth (YOY)
Source: Palo Alto Networks. YOY = year after year.
Palo Alto does not plan to make any other major acquisitions in the near future, so these metrics should continue to stabilize as it focuses on expanding its NGS business with its in-house talents and technologies.
For the full year, Palo Alto expects its adjusted FCF margin to remain between 32% and 33% and its non-GAAP EPS to increase from 16% to 18%.
The evaluations and the verdict
Based on the midpoints of Palo Alto’s own estimates, its shares are trading at around 74 times forward earnings and eight times sales this year.
These valuations don’t come cheap, but they make Palo Alto more reasonably priced than CrowdStrike, which is trading at over 330 times forward earnings and nearly 40 times this year’s sales. CrowdStrike is growing much faster than Palo Alto, but the gap is not wide enough to justify its sky-high valuation.
Therefore, it is not too late to buy Palo Alto shares. It is a leading player in the growing cybersecurity market, and its core business is naturally immune to macroeconomic threats such as rising interest rates, inflation and even a potential recession. . Put simply, this is a long-lasting and solid investment for a turbulent market.
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Leo Sun owns shares of Palo Alto Networks. The Motley Fool owns and recommends CrowdStrike Holdings, Inc. and Palo Alto Networks. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.