The cybersecurity industry is quickly growing in both importance and value as businesses face advanced threats in an increasingly online planet. Palo Alto Networks (PANW -0.34%) is one of the world’s leading providers of protection.
In a recent presentation to investors, Palo Alto said financially motivated ransomware attacks are up 37% this year compared to 2022. Additionally, hackers are stealing sensitive data from companies at a record pace. Research firm McKinsey & Company conducted a study that found equally alarming results, suggesting the damage caused by cyberattacks could result in as much as $10.5 trillion per year by 2025.
It’s little wonder Palo Alto stock is trading at an all-time high. Now, the company is betting on advanced technologies like artificial intelligence (AI) to protect its customers, which could fuel its next phase of growth. Here’s why investors sitting on idle cash — money that they don’t need for immediate expenses — might want to consider allocating at least $300 to Palo Alto stock and holding the stock for the coming decade.
Palo Alto is preparing businesses for new risks
Cloud computing, which allows businesses to operate online, changed the threat landscape forever because hackers can now strike at any time of the day, and from anywhere in the world. But in its recent financial report for the fiscal 2024 first quarter (ended Oct. 31), Palo Alto said malicious actors are now also using advanced tools like generative AI to mount highly sophisticated attacks.
It marks a new level of risk for cybersecurity, because generative AI is capable of producing highly convincing text, images, and videos that can be used to target vulnerable employees in email scams, for example. In fact, CrowdStrike says 90% of successful cyberattacks now originate at the endpoint — meaning a computer or device used by a staff member within an organization.
The use of AI also means attackers are striking faster and more frequently than ever. Unfortunately, Palo Alto says 93% of security operations centers within organizations still rely on manual processes managed by humans. That means 23% of security alerts go uninvestigated due to the heavy workload, which creates unacceptable vulnerabilities. As a result, the only way to combat AI-powered threats is with AI-powered protection.
Palo Alto is seeing rapid uptake of its new Cortex XSIAM platform, which is a security operations solution designed to speed up incident response using AI. XSIAM only launched a year ago, but it has already amassed $1 billion in bookings, $500 million of which came in the most recent quarter alone. Palo Alto’s largest XSIAM customer has deployed the technology in over 300,000 endpoints.
But XSIAM is just one AI product in Palo Alto’s arsenal. In the previous quarter, the company said AI was powering 35 products (and growing) across all three of its main categories: cloud security, network security, and security operations.
Palo Alto delivered a surge in profit during Q1
Palo Alto has always invested heavily in innovation. In fact, the company spent $1.6 billion on research and development last fiscal year, whereas one of its closest competitors, CrowdStrike, spent just $704 million over the same period.
But Palo Alto isn’t immune to the recent broader economic challenges triggered by high inflation and rising interest rates, which have forced businesses to spend money more cautiously. It has prompted the company to carefully manage its own costs to boost profitability, after years of sacrificing its bottom line to drive growth instead.
As a result, Palo Alto’s Q1 revenue grew by just 20% year over year to $1.9 billion, which was the slowest increase of the past four quarters. However, the company delivered $194 million in GAAP net income (profit), a whopping 971% jump compared to the same time last year.
However, there are signs of a return to faster revenue growth in Palo Alto’s future because its remaining performance obligations (i.e., its pipeline of work) increased 26% year over year to $10.4 billion. Plus, the annual recurring revenue in its next-generation security segment, which features many of its cloud and AI-focused products, grew by an impressive 53%.
Why Palo Alto stock is a great place to park $300
As already mentioned, Palo Alto stock is currently trading at an all-time high. None of its competitors can say the same right now.
Palo Alto’s valuation is relatively rich because it trades at a price-to-earnings (P/E) ratio of 52.9, based on its $4.97 in trailing-12-month non-GAAP earnings per share and a current stock price of $263. That’s far more expensive than the 29.2 P/E ratio of the Nasdaq-100 technology index.
But that’s why investors should take a long-term view of this company. Wall Street is forecasting continued earnings growth in fiscal 2024 and fiscal 2025, so the current price of Palo Alto stock will appear cheaper with each year you hold onto it. More importantly, the cybersecurity industry might be set for explosive growth as the threat landscape continues to evolve.
McKinsey & Company believes the corporate sector should be spending around $2 trillion per year on cybersecurity software right now, but it’s only on track to spend $189 billion in 2023. Considering the trillions of dollars in damages companies will likely have to face if they don’t invest in protection, there is a good chance the spending gap will narrow in the coming years.
That’s a massive opportunity for cybersecurity providers — and especially Palo Alto as the industry leader.