Each year for the last 26 years, global consulting firm PwC has surveyed some of the world’s top corporate CEOs to gauge their sentiment about the 12 months ahead. For the last couple of years in particular, cyber risks have emerged as a major point of concern among the executives, as data breaches and ransomware attacks have become more common.
In the 2023 edition of the survey, PwC asked 4,410 CEOs how they plan to mitigate growing geopolitical risks around the world. The top response? Increasing their investment in cybersecurity. What’s more, one-quarter of the respondents think their business will be either highly exposed or extremely exposed to cyber risks over the next five years.
Wall Street has caught on, and analysts know the cybersecurity industry will continue to attract increasing sales from the corporate sector. As a result, investors of all experience levels could benefit from adding cybersecurity stocks to their portfolio.
Palo Alto Networks (NASDAQ: PANW) might be one of the best in the bunch. The overwhelming majority of the 44 analysts tracked by The Wall Street Journal recommended buying the stock, and here’s why.
Palo Alto Networks is a recognized industry leader
Palo Alto has three focus areas: Cloud security, network security, and security operations. Under those umbrellas, it’s a recognized cybersecurity industry leader in 13 different subcategories.
It’s the go-to provider for cybersecurity solutions among larger organizations. The company doesn’t cite exactly how many customers are in its top-spending cohort, but in the second quarter of fiscal 2023 (ended Jan. 31), the number of deals valued at $10 million or more soared by a whopping 144% year over year. The cumulative dollar value of those deals jumped an even more impressive 196%.
This stems from further investments in research and development, which drove a record 35 new product releases in the first half of fiscal 2023, up 59% compared to the same period in fiscal 2022. There were several releases of note, including the artificial intelligence-driven XSIAM module designed to simplify security operations. It pulls data from endpoints, the cloud, networks, and identity systems to protect the full organizational picture with less human input, speeding up incident response.
As more organizations shift their businesses into the cloud, the attack surface will continue to expand, which leads to greater vulnerabilities, and therefore, a greater need for Palo Alto’s security tools. That’s especially true for larger companies because they tend to have more complex requirements with more digital assets and more customer data at risk.
The company is coming off a strong fiscal 2023 second quarter
Palo Alto generated $1.65 billion in revenue during Q2, up 26% year over year. But it saw a substantial 39% jump in its remaining performance obligations (RPOs) to $8.8 billion. It’s an important number to watch because it represents the company’s pipeline of work, which is expected to eventually convert into revenue. The Q2 growth rate was an acceleration compared to Q1, when it expanded by 38%.
Over the last few years, Palo Alto has focused on expanding its product portfolio and growing its customer base, and those investments came at the expense of profitability. When it comes to earnings per share (profit), the company likes to focus on its non-GAAP results, which exclude one-off costs and non-cash expenses like stock-based compensation for employees.
In Q2, its non-GAAP earnings per share jumped a whopping 81% compared to the same quarter last year. But notably, Palo Alto was also profitable on a GAAP basis with $84 million in net income. That’s often regarded as “true” profitability, and the company has now hit the mark three quarters in a row.
During the brutal stock market sell-off in the technology sector throughout last year, many investors shunned companies that weren’t able to generate a profit. Now that Palo Alto is building momentum in that area, it might be a green light for more observers to start buying in.
Wall Street loves Palo Alto Networks stock
As I touched on earlier, The Wall Street Journal tracks 44 Wall Street analysts who cover Palo Alto Networks stock. Remarkably, 35 have given the stock the highest possible buy rating — that’s 79% of the group. A further three are in the overweight, or bullish, camp, and six recommend holding.
Not a single analyst recommends selling.
Setting aside the positive long-term outlook for the cybersecurity industry, Palo Alto just updated its financial forecast for the remainder of fiscal 2023 (ending July 31). It increased its billings guidance from $9.1 billion to $9.2 billion at the high end of the range. It also dramatically increased its non-GAAP earnings per share (profit) projection from $3.44 to $4.03 at the high end of the range — a 17% jump. That revision came on the back of the strong Q2 earnings result.
Palo Alto Networks is firing on all cylinders at the moment, and leading an industry that will benefit from clear tailwinds for years to come. Investors might do well to follow Wall Street’s lead and buy this stock now.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palo Alto Networks. The Motley Fool has a disclosure policy.