Is it too late to buy Palo Alto Networks stock?

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

It’s worth noting that Palo Alto investors hit the panic button in February, with shares plunging 25% on February 21 after the cybersecurity specialist announced a strategic business shakeup that prompted management to- and lower guidance for the full year. However, the company’s latest quarterly results indicate that its strategic move to attract more customers by offering incentives and free products may be paying off.

Let’s take a look at Palo Alto’s performance last quarter and see if investors can still consider buying this cybersecurity stock following its recent rally.

The growth may not be very attractive, but there is more to it than meets the eye

Palo Alto’s fiscal fourth-quarter revenue rose 12 percent year-over-year to $2.2 billion, while non-GAAP net income rose to $1.51 per share from $1.44 dollars 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.

In terms of guidance, Palo Alto expects revenue of $2.1 billion to $2.13 billion in the fiscal second quarter, along with earnings of $1.48 per share in the middle of the guidance range. The forecast indicates that the company’s top line is on track to grow 12% to 13% year over year, while earnings growth will be around 7.5%. Again, these numbers are higher than consensus estimates of $1.42 per share in earnings on $2.1 billion in revenue.

For the full year, Palo Alto estimates revenue growth of 13% to 14%, to a range of $9.1 billion to $9.15 billion. For comparison, the company’s revenue rose 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, given its premium valuation.

It trades at 15 times sales, which is nearly double the US tech sector’s average sales multiple of 7.9. The trailing earnings multiple of 47 is also on the richer side given the anemic growth the company is expected to produce. However, a closer look at the company’s growing revenue pipeline indicates that it may be stepping on the gas in the long term.

Healthy long-term growth appears to be on the cards

Palo Alto Networks’ remaining performance obligations (RPOs) rose 20% year-over-year to $12.7 billion, outpacing the company’s top-line growth. RPO refers to the total value of a company’s future contracts yet to be fulfilled. The value is indicative of Palo Alto’s potential top-line growth, as that metric will eventually find its way into the income statement once those services are provided.

Another key metric that points to Palo Alto’s future growth is the rapidly 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, rose 43% year-on-year to $4.2 billion dollars.

In fiscal 2025, Palo Alto expects NGS ARR to grow nearly 30% year-over-year to $5.45 billion at the mid-point of its guidance range and represent 60% of its total revenue, versus 53% last year. By fiscal year 2030, Palo Alto expects 90% of its total revenue to be recurring. More specifically, the company anticipates that the ARR of its NGS platforms will reach $15 billion by fiscal year 2030.

Assuming Palo Alto’s NGS ARR reaches this point, its total revenue could reach $16.7 billion in fiscal year 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 forecast. More importantly, analysts expect the company’s growth to accelerate 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 stream is improving. That probably explains why analysts expect 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 combination of growth and value may not prefer to buy these cybersecurity stocks right now. However, growth-oriented investors looking for a company that could see an improvement in its growth rate may consider buying Palo Alto as it could justify its rich valuation thanks to the healthy revenue pipeline it is developing .