Most of the stock market had thought of the technology sector as a place to be in the past, and that is just not the case today, as names like Palo Alto Networks Inc. (NASDAQ: PANW) show strengthening financial and price momentum as the company’s latest quarterly earnings results are released to the public. While it may not be as attractive a name as some of the previous darlings in the semiconductor industry, this stock is still worth taking a look at.
Still a valid player in artificial intelligence, Palo Alto rides on the tailwind of the need for cybersecurity, as even the World Economic Forum (WEF) has warned that cyber-attacks should be more of a concern for every CEO this year and going into 2025. The last time precautions like these were recommended, it had to do with healthcare before COVID-19.
Cyber attacks have been on the rise lately. Even Palo Alto’s investor presentation points to a multi-billion impact on companies suffering from such attacks, creating increased demand for the type of services that Palo Alto offers. This is why, even after a recent selloff in the S&P 500, some analysts still expect to see double-digit upside from Palo Alto stock in the coming quarters.
Palo Alto Networks Stock Shows Strong and Accelerating Growth
Starting with the key performance indicator (KPI) that any software company like Palo Alto Networks wants to see, annual recurring revenue (ARR) reached $4.2 billion in the past quarter, representing a jump of over 43% in the past 12 months. Most competitors in the cybersecurity space can't say likewise.
After an incident that caused several headaches (and millions of dollars) to customers, shares of CrowdStrike Holdings Inc. (NASDAQ: CRWD) have yet to recover from the recent dip, selling off by more than 43% in a couple of weeks. Events like these get investor eyes – and capital – turning to the safer names in the space, and that's where Palo Alto Networks stock came to shine.
Apart from reporting no incidents and double-digit revenue growth, Palo Alto also showcased a 3.2% expansion in its operating margins. This effort led to a 5% bump in earnings per share (EPS) for investors to enjoy. More importantly, for the future growth of the company's capital, creating the compounding effects that come with free cash flow.
Calculated as operating cash flows minus capital expenditures, Palo Alto Networks reported up to $3.12 billion in free cash flow, representing up to 17% growth over the past 12 months. Along with the recurring revenue growth, driving these growth metrics is the over 30% growth in annual contract value from new business.
But here's where investors excited about artificial intelligence can take home the cake. Palo Alto Networks reported that artificial intelligence's annual recurring revenue rose four times over the year, reaching over $200 million in contracted value.
Wall Street Optimism Drives Analyst Upgrades for Palo Alto Networks Stock
Analysts at Scotiabank and Citigroup have something in common other than covering Palo Alto Networks stock as a buy and outperform rating. These analysts landed on a valuation of up to $385 a share for the stock, daring it to rally by as much as 12.1% from where it trades today.
Following the bullish trend, Legal & General Group Plc (Palo Alto’s largest shareholder) decided to boost their stake in the company by 8.5% as of August 2024, bringing their net investment up to $1.1 billion today.
But these Wall Street players weren’t the only ones willing to risk their capital to express their optimism for Palo Alto Networks stock. Nancy Pelosi, a member of the U.S. government, has also reportedly held this stock since the first quarter of 2024.
All of this bullish evidence sent the bears running away. Palo Alto Networks stock’s short interest has been on the decline since the fourth quarter of 2023 and surprisingly failed to rise during the S&P 500 selloff caused by the so-called “carry trade” unwinding between the U.S. dollar and the Japanese yen.
There is also one final check investors can go through when gauging how the market may feel about a stock, and that’s done through valuation multiples compared to the rest of the industry. Palo Alto Networks stock trades at a price-to-book (P/B) value of 60.6x today, significantly higher than the computer sector’s average valuation of 6.7x.
Markets typically have a reason to overpay for one stock among their peer group, and double-to-triple-digit growth rates alongside increased profitability in Palo Alto Networks might be the foundation for the current sentiment.
