Palo Alto Networks

Platformization + Innovation = New Growth Chapter

Palo Alto Networks (PANW) is about to turn the page on a new growth chapter in its nearly 20 years of history. The resurgent demand stems partly from exogenous causes and partly from actions taken within the company itself. Artificial intelligence (AI) applications create new challenges that enterprises need to secure with the help of third-party software. Continuous innovation has given PANW market leadership across 24 cybersecurity product categories. PANW has figured out that it can sell more and create a more sticky user base by bundling these products, making them accessible within a cohesive platform, rather than selling them as stand-alone products one by one.

Three platforms as one

PANW consolidates its offering by incorporating network, cloud, and operational security through a unified platform. In various domains, PANW has developed and will develop more next-generation software (NGS), meaning that the software is increasingly geared against emerging cybersecurity threats due to cloud and AI adoption.

The platform is centered on two products in the network domain: Next-Generation Firewalls (NGFW) and Secure Access Service Edge (SASE). These two products ensure the zero-trust paradigm, widely regarded as the benchmark in network security. SASE is considered best-in-class software for protecting hybrid and remote work environments.

Zscaler and Fortinet are PANW’s main competitors in the network security space. Cloudflare is another company that has gained traction in the field. Zscaler is the market leader in the SASE field.

Prisma Cloud is PANW's flagship cloud security solution, designed to safeguard the entire application lifecycle—from development to deployment. Cloudflare is a significant competitor in the cloud space. 

The Cortex platform optimizes the work of security analysts by automating and integrating various security operations tools. Cortex has modules such as Extended Detection and Response (XDR), Security Information and Event Management (SIEM), and Security Orchestration, Automation, and Response (SOAR).

CrowdStrike's Falcon Platform is an alternative to PANW’s XDR in the endpoint security space. SentinelOne has autonomous threat detection and response across various environments, providing capabilities that compete directly with Cortex.

Despite facing significant competition, Palo Alto Networks (PANW) stands out due to its extensive product offerings that address nearly all customer needs. This breadth gives PANW a competitive advantage, especially if the market shifts toward a preference for bundled platforms. Many industry experts notice a growing customer fatigue with standalone cybersecurity products, suggesting that a demand for integrated solutions could be on the horizon. In this context, only CrowdStrike emerges as a serious competitor to PANW in the current market landscape, comparing comprehensive bundled solutions.

AI innovations  

PANW has made significant strides in AI innovations throughout 2024. Here are some new solutions. 

AI Access Security is designed to secure access points within AI applications. AI Runtime Security protects AI applications against runtime threats such as denial-of-service attacks and prompt injections. AI Security Posture Management (AI-SPM) is a tool that enhances the security posture of organizations adopting AI technologies.

Predominantly, PANW launched Precision AI in May this year. This innovation will protect enterprises from sophisticated cyber threats, including zero-day attacks and command-and-control assaults. Precision AI is a system that integrates machine learning, deep learning, and generative AI to provide real-time security. PANW has partnered with Accenture to help organizations securely adopt AI by improving cybersecurity outcomes, showing that PANW means business by touting Precision AI as a service.

Growth acceleration

PANW reported solid earnings in Q4 for fiscal year 2024. Especially, NGS growth was strong. Annual recurring revenue (ARR) for next-generation security services reached $4.22 billion, marking an impressive 43% growth year-over-year (YoY). The platformization strategy pays off. PANW closed over 90 platform deals with customers in Q4 and is poised to achieve $15B in NGS ARR by 2030. SASE and AI innovations are cited as products attracting customers to network security services. Cortex is also a strong selling point, crossing 900M in ARR last quarter. 

PANW guided upbeat revenue for Q1 fiscal year 2025 and the number of platformization deals is set to accelerate. As a result, the share price has responded positively lately.

Valuation

Using a discount factor of 8.5% and applying consensus estimates, I calculate a fair value of $330 per share. The current share price, approximately $360, suggests investors have elevated expectations. 

I am also a strong believer in PANW’s business. However, before I fully endorse this stock, I would like to see even stronger indications of an uptick in revenues going forward, up against earlier growth rates of around 20%. PANW needs even higher growth than today if you have a mental target of seeing $500 or higher as a share price in the next couple of years.

Still, cybersecurity is a secular growth area, so I don’t think anyone is making a fool of themselves by buying PANW here. As with every investment, it is a question of time horizon, how much volatility one is willing to take in a name, and whether one sees e a favorable risk/reward as things stand today. Cost-dollar-averaging into positions is my advice for investors who want to build positions in the cybersecurity space.

Final considerations

The market is going to stay volatile until the American election is over. Right now, the bond market is about to bake in a Republican sweep, which is believed to be inflationary and lead to higher financial costs. If the Republicans carry out a sweep, there is a danger that the bond vigilantes come out to play and that the 10-year government rate will go to 5%. This will be detrimental to stock prices. so the end of the year can turn out to be negative rather than positive as everyone believes today. 

I would be careful with putting new money to work here. Wait a few weeks and see how the market behaves after the election.

Disclaimer: Important Information for Retail Investors

The information in this blog is for educational purposes only, not financial advice. Investing in stocks carries risks; past performance doesn't guarantee future results. Conduct thorough research and seek advice from financial professionals before investing.

The author is a retail investor, not a licensed advisor. Content accuracy isn't guaranteed due to changing market conditions. All investments have risks, including the potential loss of principal. Assess risk tolerance and goals before investing; diversification is key to managing risk.

The author may have positions in the mentioned stocks, which can change without notice. Readers should do their due diligence and consult professionals before acting on blog information.

Verify information from credible sources; understand prospectuses and financial statements before investing. Be aware of your financial situation and consult professionals for aligned investment choices.

Readers are responsible for their investment decisions; the author is not liable for any outcomes. Investing in individual stocks carries risks; caution, research, and professional guidance are advised for informed decisions.