Is Palo Alto Networks Stock a Buy Now?

Palo Alto Networks (PANW -1.22%), one of the world's largest cybersecurity companies, has been a great long-term stock for growth investors. If you had invested $1,000 in its IPO in 2012, your stake would be worth about $26,500 today.

However, Palo Alto's stock set a record high of $202.95 in early December and still trades less than 10% below that level. Should investors buy it today and expect even bigger gains, or should they wait for a pullback to start a new position?

Image source: Getty Images.

How fast has Palo Alto Networks been growing?

From fiscal 2014 to fiscal 2024, the latter of which ended in July 2024, Palo Alto's revenue grew at a compound annual growth rate of 30%. Most of its early growth came from Strata, which houses its next-gen firewalls and on-site network security tools. But in recent years, its growth was mainly driven by its two next-gen security (NGS) ecosystems: Prisma for its cloud-based services, and Cortex for its AI-powered threat detection tools.

Today, Palo Alto mainly measures its growth with three core metrics: its growth in remaining performance obligations (RPO, or the contractual obligations in its existing contracts that haven't been recognized as revenue yet), the annual recurring revenue (ARR) growth of its NGS ecosystems, and its total revenue growth.

Data source: Palo Alto Networks. YOY = Year over year.

Palo Alto's RPO and NGS ARR growth decelerated over the past year as the macro headwinds made it harder to land big contracts and cross-sell more services, but its revenue growth accelerated slightly in the first quarter of fiscal 2025.

For the second quarter, it expects its RPO to grow 20%-21% year over year, its NGS ARR to rise 35%-36%, and its total revenue to increase 12%-14%. For the full year, it expects its RPO to grow 19%-20%, its NGS ARR to rise 31%-32%, and its total revenue to climb 14% to a range of $9.12 billion to $9.17 billion.

During its latest conference call, CEO Nikesh Arora said AI was the "biggest signal" for its near-term growth, with the rise of faster and more sophisticated AI-driven attacks sparking an "improved security posture and improved higher spend from CIOs."

How profitable is Palo Alto Networks?

Palo Alto turned profitable on the basis of generally accepted accounting principles (GAAP) in fiscal 2023, and its GAAP net income rose nearly sixfold in fiscal 2024. It reached that milestone by cutting costs and reining in its stock-based compensation. That achievement silenced the bears who claimed it would never break even.

However, the company still regularly reports its margin and EPS on an adjusted (non-GAAP) basis, which filters out the short-term noise. Over the past year, its adjusted gross margin dipped slightly as it expanded its "platformization" strategy with loss-leading trials, promotions, and deferred revenue deals for newer cloud-based services. It expects that strategy to draw customers away from smaller and less diversified cybersecurity companies.

Data source: Palo Alto Networks.

Yet Palo Alto's adjusted operating margin continued to expand year over year as it streamlined its spending to offset that near-term pressure on its gross margin. For the second quarter of fiscal 2025, it expects its adjusted EPS to grow 5%-6%.

For the full year, it expects its adjusted operating margin to rise 20-70 basis points year over year to a range of 27.5%-28% as its adjusted EPS increases 10%-13%. At $186, Palo Alto's stock doesn't look cheap at 59 times the midpoint of that forecast. Its slower-growing rival, Fortinet, trades at just 39 times its forward adjusted earnings.

Yet Palo Alto still trades at a discount to higher-growth cloud-native cybersecurity leaders such as CrowdStrike and Zscaler, which trade at 82 and 65 times forward earnings, respectively.

Is it the right time to buy Palo Alto's stock?

Palo Alto Networks' stock has traded at higher valuations ever since its market debut, but it's justified that premium with its scale, diversification, and robust growth rates. Its high multiple might limit its near-term gains, but investors who plan to hold the stock for at least a few more years should consider buying it today.