Should One Consider Purchasing Shares of This Cybersecurity Company Following Its Stock Split?
Dissecting companies that recently enacted a stock split, like the recent 2-for-1 split by Palo Alto Networks (PANW) on Dec. 16, can be a shrewd investing strategy. Companies typically split their stock when its price skyrockets, and this surge often indicates the company's success. While some might view this escalation as a warning signal, it's essential to recognize that these price jumps often occur when a company is thriving.
Palo Alto Networks, a standout in the cybersecurity realm, is a prime example. It's a concoction of traditional and cutting-edge security offerings, with legacy firewall solutions being modernized and next-gen AI-powered tools for endpoint protection. Palo Alto's platform for this product line has been praised by Gartner for its leadership in the endpoint protection space, but they're far from the only player in this field.
CrowdStrike, another noteworthy cybersecurity provider offering AI-powered solutions, also competes in this space. Nevertheless, Palo Alto might be the more appealing investment option. In Q1 of fiscal year 2025, Palo Alto's next-gen security annual recurring revenue (ARR) soared by 40% year-over-year to $4.5 billion, surpassing CrowdStrike which reported a 27% ARR growth to $4 billion.
However, this triumph is partly overshadowed by Palo Alto's lagging overall revenue growth rate of 14% year-over-year in Q1, which reflects the struggle of its legacy platforms. Investors must balance this duality – the growing strength of the next-gen platforms with the weakness of the legacy ones.
The balance between these two forces should remain consistent in the future as management estimated overall revenue growth at a modest 14% for FY 2025, while next-gen ARR is projected to surge between 31% and 32%. But is this sufficient growth to justify the stock price?
Cybersecurity stocks are generally valued at a high premium in the stock market. As Palo Alto is a profitable business, an earnings-based metric is the best approach to assess the stock's valuation. From a forward earnings perspective, Palo Alto is currently trading at an expensive 58 times forward earnings.
Considering the revenue-based multiple, Palo Alto is still more affordable at 16 times sales, compared to CrowdStrike's 24. Both companies have carved out a dominant position in the cybersecurity marketplace, but it's a truth that cybersecurity stocks are currently overpriced. It might be wise to explore investment opportunities in other sectors.
Remember, this is a summary, and for an in-depth analysis of Palo Alto Networks' stock and valuation, additional details can be found in the enrichment section.
Sources:
- [1] Yahoo Finance (Palo Alto Networks Stock Quote)
- [2] GuruFocus (Palo Alto Networks GF Value)
- [3] S&P Global Market Intelligence (Palo Alto Market Share)
- [4] MarketWatch (Palo Alto Networks)
Given the current market valuation of cybersecurity stocks being high, investigating alternative investment opportunities might be prudent. However, from a revenue-based multiple, Palo Alto Networks is still considered more affordably priced at 16 times sales compared to competitors.
In light of Palo Alto's robust annual recurring revenue growth and dominance in the cybersecurity market, carefully considering money investment in their stock could prove to be a strategic move in finance.
