Palo Alto Networks Recently Split Its Stock: Is Now the Right Time to Invest?

Palo Alto Networks (PANW) recently made headlines by executing a 2-for-1 stock split, reducing its stock price from around $400 to approximately $200 per share as of December 16. While the reduced price may give the stock a more attractive appearance, the real question is whether this is a good time to invest in the company. Historically, some stocks experience significant gains following a split, but for others, the split is merely a cosmetic change.

In the case of Palo Alto Networks, the stock split alone hasn’t initiated any notable movements. However, there are valid reasons to consider investing based on the underlying strength of the business rather than just the stock split.

Palo Alto Networks and Its Diverse Cybersecurity Solutions

Palo Alto Networks primarily focuses on the cybersecurity sector, offering a wide array of products. The company has made a name for itself in the firewall market, providing robust protection against external threats. Despite its strong legacy in firewalls, Palo Alto is increasingly excited about its next-generation security (NGS) products.

One key offering in its NGS product suite is Cortex, an endpoint protection software that secures devices like laptops by utilizing artificial intelligence (AI) to identify potential threats. This positions Palo Alto in direct competition with CrowdStrike (CRWD), another significant player in the cybersecurity investment landscape. Although Mountain View, California-based Palo Alto has been recognized as a leader in the sector, it currently trails CrowdStrike in execution and vision completeness, according to Gartner.

Palo Alto’s management highlights a major trend in the cybersecurity industry known as "platformization." This approach encourages companies to rely on a single vendor for most of their cybersecurity requirements, rather than sourcing different components from various suppliers. CrowdStrike also employs this strategy, making both companies strong competitors in this space.

Additionally, Palo Alto offers a cloud security solution named Prisma, where it contests with major cloud firms as well as CrowdStrike, who each have their own cybersecurity solutions available.

The cybersecurity market is fiercely competitive, and while Palo Alto appears to have quality offerings, this leads to the question: does it correlate with a healthy business?

Analyzing Palo Alto's Financial Performance

If you were to ask Palo Alto’s management for signs of success, they might point you to the impressive growth of NGS's annual recurring revenue (ARR), which has surged 40% year-over-year to $4.5 billion. For comparison, CrowdStrike recorded an ARR of $4.02 billion, growing at a rate of 27%.

Nonetheless, Palo Alto’s legacy business does introduce some limitations to its overall growth, as total revenue climbed by 14% year-over-year to reach $2.1 billion. However, the company managed to maintain a strong profit margin, turning 16% of its revenue into profit.

Wall Street analysts are anticipating a continuous growth trajectory with an expected 14% revenue increase for Palo Alto's fiscal year ending on July 31, 2025. This suggests stability for the company, but the question remains whether this growth aligns with the stock price.

Given that Palo Alto is a mature company, valuing it through earnings is advisable. Presently, it commands a high valuation of nearly 60 times its forward earnings, making it relatively expensive.

In comparison, CrowdStrike trades at a significantly higher multiple of 93 times forward earnings, thus making Palo Alto appear more affordable. However, it is essential to recognize that CrowdStrike has yet to achieve profit margins comparable to Palo Alto's.

Using the price-to-sales ratio provides another perspective. Palo Alto's stock may still be relatively cheaper, which seems justified given that CrowdStrike exhibits a higher overall revenue growth rate.

So, what does all this mean for investors contemplating Palo Alto's stock? The cybersecurity industry is poised for substantial growth, and Palo Alto is well-positioned to capitalize on these trends, much like CrowdStrike. If Palo Alto can sustain faster growth in the NGS sector than CrowdStrike, it may eventually become the leading cybersecurity stock among investors. Nevertheless, its broader focus means it might not present the same extraordinary growth metrics as CrowdStrike.

Although CrowdStrike itself is an appealing investment, there is also merit in considering Palo Alto Networks as a potential addition to investment portfolios, as the cybersecurity sector is likely to yield numerous winners in the coming years.

Please note that the author has positions in CrowdStrike. No positions are held in Palo Alto Networks. Investors should conduct their own research before making any decisions.

investment, stocks, cybersecurity