Why Palo Alto Networks' Multi-Year Uptrend Is Far From Over

Key Points

• Palo Alto Networks can sustain its multiyear uptrend because it is the leading cybersecurity provider, which is supported by numerous tailwinds.
• Robust cash flows allow for reinvestment and a healthy balance sheet, and equity rose by double digits for another quarter.
• Analysts are raising their targets for this stock and indicate a double-digit upside for the market from critical support targets. 

Palo Alto Network’s NASDAQ: PANW stock price has been in a multi-year uptrend that will continue for many more years because of its leadership position in cybersecurity. It is the world’s leading cybersecurity provider, and its business is supported by the increasing use of digitization by businesses and industries, compounded by the exponential rise in cyber threats. The latest data shows cybersecurity incidents accelerating above 50% in 2024 and are expected to continue growing, aided by AI. With the rise in threat comes an increase in time and cost to mitigate, making cybersecurity and Palo Alto vital to the global economy.

Platformization Drives Multi-Year Trend in Cybersecurity

Palo Alto’s FQ1 results prove that its shift to platformization was the right move. The company’s CEO says platformization is critical to cybersecurity outcomes, and businesses have come to realize it. This means a 13.8% increase in quarterly revenue compared to last year for Palo Alto, driven by high-double-digit increases in NextGen Security ARR and RPO. ARR in the company’s critical offerings is up 40% year-over-year (YoY) to $4.5 billion, about 50% of the expected annual revenue, with total revenue growth accelerating sequentially from the previous quarter. Product sales grew by 3.7%, while subscriptions, which include the NextGen offerings, are up by 16.1%. 

Margin news is good. The company experienced a forecasted contraction in the gross margin due to freebies and price incentives intended to drive NextGen sales but less than expected. The gross margin contracted only 80 basis points and was offset by improved operating results also due to the platformization efforts. GAAP net income is up 76% and adjusted by 13%, with adjusted earnings of $1.56 being $0.08 better than the consensus reported by MarketBeat and up 13% YoY, compounded by favorable guidance. 

The company raised its guidance for Q2 and the year because of the developing trends. The company expects NextGen ARR and RPO to sustain high double-digit growth rates in Q2 and the year, putting the target for adjusted EPS at $6.33 or a nickel above the consensus forecast. The salient point is that analysts are impressed with the news, which is fueling an upgrade cycle. 

The first analysts’ revisions tracked by MarketBeat include numerous price target increases and an upgrade that aligns with the 2024 trends. The upgrade is from Rosenblatt, which raised the stock to Buy from Hold, aligning with the consensus, and the price target was raised to $425. The $425 target would be another new all-time high for the stock price and a stepping stone to the higher levels indicated by the revision trend. The high-end range puts this stock at $450 within the next 12 months, a 15% upside from the critical support target. 

Palo Alto Networks Secures Shareholder Value With Rising Equity

Palo Alto Networks doesn’t pay dividends or buy back significant amounts of stock but provides shareholder value in other ways, investing in and growing the business and shareholder value. Balance sheet highlights from FQ1 include increased cash and assets compounded by a reduction in current and total liability. The net result is a 14.3% increase in shareholder equity in addition to the 24% increase posted last year. Equity is expected to continue growing in F2025 and F2026 because of the revenue growth and cash flow outlook. 

The stock price pulled back following the release, showing that the market was expecting the good news. However, the market remains above the critical support level near $380 and will likely confirm support at that level. In that scenario, the market will also confirm a continuation of the uptrend indicated by the break to highs in early November. If not, this market could fall to $360 or lower before regaining traction and continuing the uptrend.