Palo Alto Networks(NASDAQ: PANW) stock has staged a remarkable recovery in the market in the past six months, gaining more than 31% as of this writing. It seems to have put the disappointing start to 2024 behind it with a set of solid fiscal 2024 fourth-quarter results (for the three months ended July 31), released on Aug. 19.
It's worth noting that Palo Alto investors pressed the panic button in February, and the stock crashed 25% on Feb. 21 after the cybersecurity specialist announced a strategic business change that caused management to reduce its full-year guidance. However, the company's latest quarterly results indicate that its strategic move of attracting more customers by way of offering incentives and free products could be bearing fruit.
Let's take a look at Palo Alto's performance in the previous quarter and check if investors can still consider buying this cybersecurity stock following its recent rally.
Growth may not be very attractive, but there's more than meets the eye
Palo Alto's fiscal fourth-quarter revenue increased 12% year over year to $2.2 billion, while non-GAAP net income rose to $1.51 per share from $1.44 per share in the same quarter last year. Wall Street would have settled for revenue of $2.16 billion and earnings of $1.41 per share.
Regarding guidance, Palo Alto is expecting fiscal Q2 revenue of $2.1 billion to $2.13 billion, along with earnings of $1.48 per share at the midpoint of its guidance range. The forecast indicates that the company's top line is on track to increase by 12% to 13% on a year-over-year basis, while earnings growth will be around 7.5%. Again, these numbers are higher than consensus estimates of $1.42 per share in earnings on revenue of $2.1 billion.
For the full year, Palo Alto is forecasting revenue growth of 13% to 14% to a range of $9.1 billion to $9.15 billion. For comparison, the company's revenue increased 16% in the previous fiscal year to $8 billion. Non-GAAP net income is expected to jump 10% to $6.25 per share. The year-over-year growth that Palo Alto is forecasting may not seem attractive at first, considering its premium valuation.
It's trading at 15 times sales, which is nearly double the U.S. technology sector's average sales multiple of 7.9. The trailing earnings multiple of 47 is also on the richer side, considering the anemic growth that the company is projected to deliver. However, a closer look at the company's improving revenue pipeline indicates that it could step on the gas in the long run.
Healthy long-term growth seems to be in the cards
Palo Alto Networks' remaining performance obligations (RPO) increased an impressive 20% year over year last quarter to $12.7 billion, outpacing the company's top-line growth. RPO refers to the total value of a company's future contracts that are yet to be fulfilled. The metric is an indicator of Palo Alto's potential top-line growth, as this metric will eventually find its way into the income statement once those services are delivered.
Another key metric that's indicative of Palo Alto's future growth is the fast-growing adoption of its next-generation security (NGS) platforms. Palo Alto's NGS platforms include fast-growing niches such as secure access service edge (SASE), cloud security, and artificial intelligence (AI). The company's annualized recurring revenue (ARR) from NGS, which refers to the annualized revenue of all active contracts for its next-generation offerings at the end of the reporting period, increased a solid 43% year over year to $4.2 billion.
In fiscal 2025, Palo Alto is expecting NGS ARR to increase almost 30% year over year to $5.45 billion at the midpoint of its guidance range and account for 60% of its overall revenue, up from 53% last year. By fiscal 2030, Palo Alto is expecting 90% of its overall revenue to be recurring. More specifically, the company anticipates the ARR of its NGS platforms to hit $15 billion by fiscal 2030.
Assuming Palo Alto's NGS ARR hits that mark, its overall revenue could hit $16.7 billion in fiscal 2030 (90% of $16.7 billion is $15 billion). So Palo Alto's top line could more than double over the next six fiscal years, based on its projections. More importantly, analysts are expecting an acceleration in the company's growth in the next fiscal year, which is evident from the following chart.
PANW Revenue Estimates for Current Fiscal Year data by YCharts.
Should investors buy the stock now?
Palo Alto's revenue pipeline is improving. That probably explains why analysts are expecting the company to enjoy stronger growth. However, investors who missed the stock's recent rally and are looking to add Palo Alto Networks to their portfolios right now will have to pay a rich valuation.
Investors looking for a mix of growth and value may not prefer buying this cybersecurity stock right now. However, growth-oriented investors looking for a company that could witness an improvement in its growth rate can consider buying Palo Alto, as it may be able to justify its rich valuation thanks to the healthy revenue pipeline that it's developing.
Should you invest $1,000 in Palo Alto Networks right now?
Before you buy stock in Palo Alto Networks, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Palo Alto Networks wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $792,725!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 22, 2024
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
