Is it too late to buy Palo Alto Networks stock?

Palo Alto Networks (PANW 0.36%) The stock has seen a remarkable turnaround in the market over the past six months, gaining more than 31% at the time of writing. The disappointing start to 2024 appears to have been put behind it with a set of solid results for the fourth quarter of fiscal 2024 (the three months ended July 31), released on August 19.

It’s worth noting that Palo Alto investors hit the panic button in February, with shares falling 25% on Feb. 21 after the cybersecurity specialist announced a strategic business change that caused management to lower its full-year guidance. However, the company’s latest quarterly results suggest that its strategic move to attract more customers by offering incentives and free products may be bearing fruit.

Let’s take a look at Palo Alto’s results from the previous quarter and see if investors should still consider buying shares of this cybersecurity company after its recent rally.

Growth may not seem too attractive, but there is more to it than meets the eye

Palo Alto’s fiscal fourth-quarter revenue rose 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 been happy with revenue of $2.16 billion and profit of $1.41 per share.

In terms of guidance, Palo Alto is expecting fiscal second-quarter revenue of $2.1 billion to $2.13 billion, along with earnings of $1.48 per share, at the midpoint of the guidance range. The guidance suggests the company’s top line is on track for year-over-year growth of 12% to 13%, while earnings growth will come in at around 7.5%. Again, these numbers are higher than the consensus estimate of $1.42 per share 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. By comparison, the company’s revenue grew 16% in the previous fiscal year to $8 billion. Non-GAAP net income is expected to rise 10% to $6.25 per share. The year-over-year growth that Palo Alto is forecasting may not seem attractive at first glance, given its premium valuation.

It trades at 15 times sales, which is almost twice the average US tech sector sales multiple of 7.9. Its earnings multiple for the last 47 months is also on the high side, given the anemic growth the company is expected to deliver. However, a closer look at the company’s improving revenue suggests it could press the gas pedal in the long run.

Healthy, long-term growth seems within reach

Palo Alto Networks’ remaining performance obligations (RPO) rose an impressive 20% year over year in the latest quarter to $12.7 billion, outpacing the company’s revenue growth. RPO refers to the total value of the company’s future contracts that have not yet been delivered. This metric is an indicator of Palo Alto’s potential revenue growth, as it will ultimately show up on the P&L after those services are delivered.

Another key indicator of Palo Alto’s future growth is the rapidly growing adoption of next-generation security (NGS) platforms. Palo Alto’s NGS platforms cover fast-growing niches such as secure access to service edge (SASE), cloud security, and artificial intelligence (AI). The company’s annual recurring revenue (ARR) from NGS, which refers to the annual revenue from all active contracts for 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 expects NGS ARR to grow nearly 30% year over year to $5.45 billion, at the midpoint of its guidance range, and to account for 60% of total revenue, up from 53% last year. By fiscal 2030, Palo Alto expects 90% of total revenue to be recurring. Specifically, the company projects that ARR for its NGS platforms will reach $15 billion by fiscal 2030.

Assuming Palo Alto’s NGS ARR reaches this level, its total revenue could reach $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, according to forecasts. More importantly, analysts expect the company’s growth to accelerate in the next fiscal year, as seen in the chart below.

PANW revenue estimates for the current fiscal year according to YCharts.

Should investors buy stocks now?

Palo Alto’s revenues are improving. That probably explains why analysts expect the company to enjoy stronger growth. However, investors who missed the stock’s recent rally and want to add Palo Alto Networks to their portfolios will have to pay a high valuation.

Investors looking for a mix of growth and value may not want to buy cybersecurity stocks right now. However, growth investors looking for a company that could see an improvement in its growth rate may want to consider buying Palo Alto, as it can justify its high valuation with the healthy revenue pipeline it is developing.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has a position in and recommends Palo Alto Networks. The Motley Fool has a disclosure policy.