Palo Alto Networks' (PANW -1.23%) stock price may look a bit cheaper than it used to. That's because it recently underwent a 2-for-1 stock split that dropped the stock from around $400 per share to $200 per share as of Dec. 16.
In the past, stock splits have been a kick-start for some stocks to go on monster runs. It's just business for others, as the split only has cosmetic effects. For Palo Alto, the stock split hasn't done much so far.
However, there's a solid business associated with this stock, which is a far better reason to buy than a stock split.
Palo Alto has a broad range of cybersecurity offerings
Although it has a broad product range, Palo Alto Networks is focused on cybersecurity products. Historically, the company has been a leader in the firewall space, protecting its customers from external threats. While Palo Alto still has its firewall business, it's most excited about its next-gen security (NGS) products.
Part of the company's NGS product suite is its endpoint protection software, called Cortex, which protects network access points like laptops by using artificial intelligence (AI) to detect threats. If this sounds familiar, that's because Palo Alto is competing against another popular cybersecurity investment in this space: CrowdStrike (CRWD -2.76%). While Gartner named Palo Alto a leader in this arena, it is still behind CrowdStrike in its ability to execute and completeness of vision.
Palo Alto's management calls out a huge tailwind in the cybersecurity industry called "platformization." This is when a company uses a single provider for most of its cybersecurity needs, rather than piecing together parts from various vendors. This is CrowdStrike's strategy as well, and it makes these two formidable foes.
Palo Alto also offers a cloud security offering known as Prisma. The major cloud computing companies, as well as CrowdStrike, have their own cybersecurity products competing in this space.
The cybersecurity market is ultra-competitive, and Palo Alto has quality products. But does that translate into a strong business?
Palo Alto's financials are a two-sided story
If it were up to Palo Alto's management, they would point you to NGS's annual recurring revenue (ARR) growth as a sign of success (which includes Cortex and Prisma), as it was up 40% year over year to $4.5 billion. For reference, CrowdStrike's last ARR figure was $4.02 billion, growing at a 27% pace.
However, Palo Alto also has its legacy business that dampens overall growth, as total revenue rose 14% year over year to $2.1 billion. Still, Palo Alto produced a strong profit margin, converting 16% of revenue into profits.
Wall Street analysts project 14% revenue growth for Palo Alto's current fiscal year (ending July 31, 2025), so the status quo should continue. But does that growth rate match the stock price?
Because Palo Alto is a mature business, it's best to value it using earnings. At nearly 60 times forward earnings, Palo Alto is an expensive stock.
PANW PE Ratio (Forward) data by YCharts
CrowdStrike's stock trades for a far more expensive 93 times forward earnings, making Palo Alto's stock seem fairly cheap by comparison. However, that's not a great comparison, since CrowdStrike's profit margin hasn't reached Palo Alto's levels.
Instead, I'll use the price-to-sales ratio to compare each stock.
PANW PS Ratio data by YCharts
Based on this perspective, Palo Alto is still cheaper, but that makes sense, since CrowdStrike's overall revenue growth rate is higher.
So what does this mean for Palo Alto's stock? There are massive tailwinds in the cybersecurity space, and Palo Alto is set to capitalize on them, just like CrowdStrike. If Palo Alto continues to grow quicker than CrowdStrike in the NGS space, it may have a chance at surpassing CrowdStrike as the consensus top cybersecurity stock here. However, because it isn't solely focused on the NGS lineup, Palo Alto won't put up eye-popping numbers like CrowdStrike will.
Although I'm still a big CrowdStrike fan, Palo Alto may be worth owning, as the cybersecurity space will likely produce many winners over the next few years.
