With momentum returning, is now the time to buy Palo Alto stock?

What a difference a few months can make. In February, Palo Alto Networks (PANW -0.31%) saw its stock tank after the cybersecurity company said it was seeing “spending fatigue” among its customers and embarked on a bold new strategy.

Weeks later, on his winning call, rival CrowdStrike Holdings (CRWD 0.90%) raved about Palo Alto’s large collection of single-problem solutions, saying, “Multi-platform hardware vendors have evangelized their stitched-together mosaics of point products, masquerading as thin-shelled fragmented platforms… It’s the organization caught in these fragmented pseudos. platforms full of bolt-on point products that are suffering from fatigue.”

With Palo Alto reporting solid fiscal fourth-quarter results and issuing an upbeat outlook for fiscal 2025, and CrowdStrike dealing with the fallout from a widespread outage last month, the tides in the cybersecurity industry have certainly turned.

Palo Alto’s strategy is gaining momentum

Palo Alto’s big change in strategy was to try to move customers away from a patchwork of single-issue solutions from different vendors on one of its three main integrated platforms, in what it called the its “platformization”.

To achieve this, however, the company decided to allow customers to use some of its services for free while having contracts in place with other cybersecurity providers, as customers would not want to pay for duplicate services.

At the time, the company said this new strategy would be the equivalent of giving customers about six months of free product capabilities and would put upward pressure on revenue and billings over the next 12 to 18 months.

Six months into the new strategy, things seem to be going well. It added 90 new platforms in the previous quarter, compared to 65 additions last quarter. More than 1,000 of its top 5,000 customers are now on one platform. These platforms are customized collections of cybersecurity tools presented together in an easy-to-manage format with a unified management system. They provide centralized control and streamlined processes, helping customers achieve stronger data security shields without adding a lot of additional security staff.

Its annual recurring revenue per “platformed” customer, meanwhile, rose 10% from the first quarter, showing the growth it’s getting from customers transitioning from specific point solutions to a security platform and single-platform customers to more many platforms.

Overall, Palo Alto’s fourth-quarter revenue rose 12% to $2.2 billion. Services revenue grew 18%, with subscription revenue up 23% and support revenue up 10%. Product revenue was down 5%.

The company expects fiscal 2025 revenue to grow 13% to 14% to a range of $2.1 billion to $2.13 billion. It is looking for adjusted earnings per share (EPS) of $6.18 to $6.31, representing growth of 9% to 11%.

For the fiscal first quarter of 2025, it guided for revenue growth of 12% to 13% to between $2.10 billion and $2.13 billion and adjusted EPS growth of 7% to 8% to a range of $1.47 to $1.49.

Palo Alto said it is seeing more interest from customers around its Cortex platform following CrowdStrike’s disruption.

Image source: Getty Images

Is It Time to Buy Palo Alto Stock?

Clearly, the best time to buy Palo Alto stock was right after it got locked in on second-quarter results; the stock is now back to where it was before it introduced its new platforming strategy. The company is executing on that strategy, even though it’s still not growing its revenue in the high-teens percentages as projected before its February reset.

The company is on the right track, but the stock price rebound has left it with a strong valuation. It now trades at a forward price-to-sales (P/S) ratio of more than 13 times fiscal 2025 estimates for a company that projects revenue growth of 13% to 14%. That’s a very high valuation and well above where the company has been trading for the past two years, even though revenue growth was projected to be higher then.

PANW PS rate (forward one year); data by YCharts.

At the end of the day, Palo Alto stock is higher since the bar reset below and then jump over it. While this is often a recipe for short-term stock success, its valuation has become too frothy for me at this point. As such, I would bet against the recent bullish trend and stay away from this cybersecurity stock.