After its results report, Palo Alto Networks (NASDAQ: PANW) shares are volatile. The current financials weren't bad, but investors worry about PANW management's ambitious plan to consolidate cybersecurity market dominance. Zscaler's latest results conference almost mentioned PANW, stating its competitor's attack won't work.
Another explanation for PANW's recent activity is that the stock price was frothing in the month before the latest update, not Wall Street's "worries."
2024: PANW "activating its AI leadership" PANW is old. It predates cloud computing, when enterprise-network security was all that mattered. CEO Nikesh Arora kept the company relevant despite its size. After taking over in 2018, Arora went on an aggressive acquisition binge to get PANW back on track for its mass migration to cloud-based computing.
Importantly, PANW is a prominent player in secure access service edge (SASE) cybersecurity, which combines hardware-based network security with cloud software-based protection. On earnings calls, Zscaler co-founder and CEO Jay Chaudhry often contradicts Arora's claims. Zscaler's secure service edge (SSE) technology is more focused on the "cloud only" than SASE's capacity to cover all IT operations. As an SSE provider, PANW excels.
Arora is ready to attack again in 2024, despite the tech explanation. A new go-to-market strategy will likely limit revenue growth to the low teens throughout the next year, instead of the high teens to 20% growth the company has reported in recent years. Arora discussed growth change in conference call:
Thus, PANW will install and use its equipment for free until cybersecurity contracts expire. Arora expects a temporary drop in growth for the year to a year-and-a-half ahead. Due to its broad technology portfolio, including new AI-powered capabilities that many of its competitors lack, PANW feels it can succeed in this strategy.
The stock is valued high, but how? Whether Arora and company succeed is unknown. Similar doubts arose when the CEO came over in 2018. The stock rose rapidly as it overcame obstacles and reached new milestones. I expect something similar this time.
PANW stock now commands a high premium. I think this is the main cause for the post-earnings dip, not concerns about cybersecurity market share consolidation. Despite the drop, shares trade for 55 times current-year expected profits per share and 32 times expected free cash flow.
This is approaching PANW's five-year free-cash-flow value peak. High valuations can produce significant stock price volatility, so keep that in mind while considering how to proceed. However, PANW stock has continued to rise despite its high valuation until now. Since Arora took over, I've been a PANW shareholder, and I'm pleased to keep holding in 2024 and beyond as the firm tries to gain market share in the tough cybersecurity industry.
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