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Proprietary Data Insights Financial Pros’ Top Cybersecurity Stock Searches in the Last Month
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Pros Pick Their Top 5 Cybersecurity Stocks
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The global cybersecurity market hit almost $14 billion in 2023. By 2032, it’s expected to eclipse $32 billion. Yet, Palo Alto Networks (PANW), one of the top players in the industry, saw shares plunge by 25% after it delivered disappointing earnings. Bears say the correction was overdue since revenues grew 19% but the stock was up 112% YoY. Yet, we all know markets look at both what’s happening and what will happen. Which is why financial pros started searching out the stock in earnest, nearly 3x more than Fortinet (FTNT) and 5x more than Datadog (DDOG). We wanted to see whether the stock still had further to fall or if the selling was overdone. Palo Alto Network’s Business Founded in 2005 by Nir Zuk, a visionary engineer, Palo Alto Networks offers a suite of IT security products and services, from firewalls to endpoint protection to cloud security and threat intelligence. The company boasts a massive global reach with over 81,000 customers. It’s latest push is called ‘platformization’ – an approach to provide customers with comprehensive and integrated security solutions. While it increases the value proposition and total addressable market, it reduces short-term revenues and profitability through lower upfront fees and higher SG&A expenses.
Source: Palo Alto Networks Q2 2024 Investor Relations We see this in the revenue breakdown by products and services, as product sales slowed markedly since Q4 of last year:
Source: Palo Alto Networks Q2 2024 Investor Relations During the last earnings call, management spoke to ‘spending fatigue’ in cybersecurity. Essentially, adding new point products wasn’t driving better security outcomes. If true, this will hit more than just Palo Alto Networks, which, many of its peers traded lower on Palo Alto’s earnings release as a result. Financials
Source: Stock Analysis Palo Alto Networks has seen consistent revenue growth in the mid-20 % range for the past decade, save for the pandemic. Naturally, investors panicked when growth dropped to 19%, despite margins being the highest they’d been in a while. Management’s forecast of 15%-16% YoY growth for 2024 didn’t assuage their fears. However, the company expected the adjusted free cash flow margin largely unchanged. With very little debt on the books, the drop in the share price was clearly all about valuation. Valuation
Source: Seeking Alpha So, is Palo Alto Networks overvalued? Not really. It trades at 31.9x cash, which is the second cheapest behind Fortinet. Even its price-to-earnings growth (PEG) ratio at 2.2x isn’t all that high. Yes, the P/E ratio is a bit heavy. But that’s to be expected in the near-term. Growth
Source: Seeking Alpha Relative to its peers, Palo Alto Networks expects revenue growth that’s second lowest, only beating out Fortinet. Crowdstrike (CRWD) plans to hit 40% this year, just like last year. Even CloudFlare (NET) expects close to 30% growth. So, is the ‘spending fatigue’ real or just a Palo Alto Networks problem? Profitability
Source: Seeking Alpha Digging deeper, it turns out Palo Alto Networks’ profitability is the highest on the net income margin and second highest on free-cash-flow margin. For all the growth its peers deliver, they aren’t as profitable. However, they still generate cash that, though not as efficiently as Palo Alto Networks. Our Opinion 7/10 Clearly, the initial selloff in Palo Alto Networks stock was overdone. However, we don’t see evidence of this ‘spending fatigue’ elsewhere, implying it’s a specific issue to one company. Taking that further, we should expect Palo Alto Networks’ growth to remain tempered for this year and probably next. That doesn’t make the stock a screaming buy. But it’s one that you keep on your watchlist and pickup on dips. |
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