Palo Alto Networks: One Of My Favourite Tech Shares For 2024 (NASDAQ:PANW)

Introduction

If there’s one factor I’ve highlighted in latest articles, it is my elevated deal with worth shares, provided that the inventory market valuation hints at subdued long-term complete returns.

Typically talking, this favors shares with low valuations and/or first rate yields, as we will anticipate a much bigger a part of future complete returns to return from dividends.

I mentioned all of this in my 2024 Outlook article, which was printed on December 5.

So, why is this text about Palo Alto Networks (NASDAQ:PANW), a high-flying tech inventory that has risen 111% in 2023?

Nicely, as I am not a typical worth investor (I search for the candy spot between progress and worth), I all the time have progress shares on my watchlist to purchase as soon as alternatives seem.

That is what I wrote in my 2024 Outlook article (emphasis added):

I am additionally shopping for progress shares, albeit very rigorously. I primarily do that to hedge myself towards being flawed (I do not wish to be completely obese in higher-yielding shares and worth performs). On this case, I am shopping for confirmed shares with good steadiness sheets and anti-cyclical demand. I am not shopping for corporations with lofty valuations, operations in extremely aggressive industries, and a excessive dependence on speculative inventory market sentiment.

Therefore, on this article, I’ll clarify why I put the PANW ticker on my watchlist. Regardless of its latest efficiency, I consider it presents worth on inventory value corrections.

So, let’s take a more in-depth look!

Cyber Safety Is The place It is At

Palo Alto Networks might not be low cost, which is why I’m ready for a possible correction of this red-hot inventory market. Nevertheless, it presents anti-cyclical demand progress in one of the vital industries on the earth.

The corporate is a world cybersecurity supplier established in 2005 and headquartered in Santa Clara, California. It at the moment has a $93 billion market cap.

In line with the corporate, it goals to create a safer world by empowering enterprises, organizations, service suppliers, and authorities entities to defend towards refined cyber threats.

As most of us could also be conscious, the huge rise in international connectivity comes with unbelievable dangers.

Utilizing Statista information (as of November 2022), we see that we’re in a large uptrend on the subject of cybercrime. The cybercrime the world witnessed earlier than the pandemic is a stroll within the park in comparison with what we must always anticipate within the subsequent few years.

With that in thoughts, Palo Alto Networks presents a spread of merchandise, subscriptions, and assist providers.

{Hardware} and software program firewalls, SD-WAN, Panorama, and subscriptions like Superior Menace Prevention, GlobalProtect, and Enterprise DLP are key parts.

Cloud-delivered safety providers cowl Superior URL Filtering, DNS Safety, IoT/OT Safety, and extra.

Prisma Entry and Prisma SD-WAN improve cloud safety, whereas Prisma Cloud secures cloud-native functions.

It has a well-balanced revenue breakdown between subscriptions and assist providers.

USD in Million	2022	Weight	2023	Weight
Subscription	2,539	46.2 %	3,335	48.4 %
Help	1,599	29.1 %	1,979	28.7 %
International Cybersecurity Supplier	1,363	24.8 %	1,578	22.9 %

Click on to enlarge

Primarily, PANW adopts a holistic strategy to cybersecurity, providing a set of options that span throughout community safety, cloud safety, safety operations, and menace intelligence.

This all-encompassing technique makes certain that organizations can fortify their “digital perimeters” primarily based on a “zero-trust” mannequin.

What’s attention-grabbing are the ML-Powered Subsequent-Era Firewalls.

These firewalls embed machine studying within the core, enabling real-time detection and prevention of zero-day threats.

Primarily based on this context, PANW is on the proper place on the proper time, as evident by its historic gross sales progress.

Since 2012, PANW has grown its income by roughly 3,800%, with a notable acceleration after 2020, when the world witnessed the beginning of extra speedy cybercrime progress (we additionally see this within the Statista chart above).

With that in thoughts, let’s dig a bit deeper to learn the way PANW is evolving and rising shareholder worth.

PANW Stays In A Nice Spot For Progress

Throughout the November 29 UBS Know-how Convention, the corporate elaborated on its working setting and capabilities.

Probably the most vital issues the corporate talked about was that the monetary affect of cyber assaults, with hackers demanding substantial ransom funds, has created a profitable marketplace for cybersecurity providers.

Because of the minimal authorized penalties confronted by attackers, companies are compelled to put money into strong cybersecurity measures to guard their belongings and reputations.

There may be rising recognition on the company degree, together with the C-suite and board of administrators, concerning the vital significance of cybersecurity.

This heightened consciousness interprets into sustained cybersecurity budgets, indicating a constant and strong demand for cybersecurity options.

Much more vital, the adoption of synthetic intelligence (“AI”), significantly precision AI within the cybersecurity area, represents a major enterprise alternative.

Corporations like Palo Alto Networks are leveraging large datasets, ingesting petabytes of knowledge each day, to boost their AI-driven cybersecurity capabilities.

Copilots, pushed by generative AI, are anticipated to grow to be desk stakes within the trade throughout the subsequent 12 to 18 months.

In an in-depth paper, Palo Alto notes that AI can be a fantastic driver of effectivity to get extra security with fewer individuals.

Trying ahead, the trade is poised for consolidation and “platformization.”

As copilots grow to be commonplace, managing a number of options from completely different distributors might pose a problem for companies.

This pattern opens up alternatives for corporations that may supply built-in options, doubtlessly resulting in market consolidation and the emergence of dominant platforms within the cybersecurity area.

In gentle of those developments, the corporate’s enterprise into XSIAM addresses vital ache factors within the cybersecurity trade, significantly in SOC (Safety Operations Middle) administration.

The recognized inflection level emphasizes the necessity for real-time safety options, making a market demand for progressive choices like XSIAM.

Its success in decreasing the meantime to remediate safety incidents considerably positions XSIAM as a compelling answer for companies searching for to boost their cybersecurity capabilities.

Financially, Palo Alto Networks has generated a formidable $1 billion pipeline inside a yr of XSIAM’s launch, reflecting strong market curiosity and potential income progress.

In the meantime, the varied buyer base, together with 5,300 Cortex clients, presents a strong basis for tapping into present relationships and increasing the market attain for XSIAM.

Current Numbers Verify A Sturdy Pattern

Within the first quarter of its 2024 fiscal yr, Palo Alto reported spectacular monetary outcomes.

• The corporate achieved a income of $1.88 billion, marking a 20% progress.
• Product income elevated by 3%, whereas complete service income skilled a strong 25% progress.
• Notably, subscription income reached $988 million, rising by 29%, and assist income stood at $549 million, reflecting a 17% improve.

Unsurprisingly, PANW witnessed constant income contributions throughout all geographic areas.

The Americas grew by 20%, EMEA by 19%, and JAPAC by 23%.

Particularly the power of PANW’s next-generation capabilities was a key driver, with NGS Annual Recurring Income (“ARR”) surpassing $3 billion for the primary time, which interprets to a outstanding 53% progress charge.

Sturdy contributions have been noticed throughout your entire NGS portfolio in the course of the first quarter.

Complete billings reached $2.02 billion, marking a 16% improve. Some analysts thought that this quantity was too low. This induced some post-earnings volatility.

Nevertheless, the corporate attributed volatility in billings to ongoing cost conversations with clients. The corporate famous that discussions about cost phrases and period in closing renegotiations had an affect on the full billings.

Palo Alto Networks employed numerous monetary methods. These included providing annual billing plans, financing by means of PANFS, and associate financing.

Whereas these methods didn’t affect demand or annual income, they launched variability in complete billings.

Moreover, the corporate confirmed important enchancment in working margins, increasing by 760 foundation factors year-over-year.

The gross margin for Q1 stood at 78%, rising by 370 foundation factors. This enchancment was attributed to larger gross margins and efficiencies throughout working expense traces.

Including to that, the corporate maintained a robust money place, ending Q1 with money equivalents and investments of $6.9 billion.

Money movement from operations was $1.526 billion, and adjusted free money movement for the quarter was $1.489 billion.

The corporate is anticipated to finish this yr with $3.8 billion in web money, which implies it has extra cash than gross debt.

Because of this steadiness sheet, the corporate is protected towards an setting of elevated charges and is in a great spot to accumulate corporations.

In its 1Q24 incomes name, it mentioned the definitive agreements to accumulate two corporations, Dig Safety Options, and Talon Cyber Safety, for roughly $232 million and $435 million, respectively.

These acquisitions are anticipated to shut within the second quarter of the 2024 fiscal yr.

Furthermore, the corporate repurchased roughly 300,000 shares within the first quarter.

Over the previous three years, the share depend has elevated by 8%, which is first rate, provided that numerous tech shares are diluting shareholders rather more aggressively.

I anticipate the expansion charge in shares excellent to sluggish additional as PANW turns into extra mature and able to shopping for again inventory.

It additionally didn’t maintain PANW from outperforming its tech friends.

Over the previous twelve months, PANW has returned 110%, beating the spectacular 55% efficiency of the tech-heavy QQQ ETF (QQQ).

This brings me to the valuation.

Valuation

Since its IPO, PANW shares have returned 26% per yr.

Going ahead, I anticipate the inventory to outperform its friends, albeit with a doubtlessly decrease complete return.

Utilizing the information within the chart under:

• PANW is buying and selling at a blended P/E ratio of 60.6x.
• This yr (2024), EPS is anticipated to extend by 23%, adopted by 17% anticipated progress within the 2025 fiscal yr and 19% progress within the yr after that.
• I consider that these progress charges warrant an EPS a number of between 50x and 55x, which might point out an annual complete return of 11% to 16%.

These numbers additionally indicate a value goal exceeding $400 (the present value is $295).

Nonetheless, I’m not shopping for PANW at present costs.

The latest surge within the inventory market and the truth that the market has now priced in six rate of interest cuts in 2024 lets me consider that it is vital to watch out at present ranges – particularly when coping with progress shares.

Whereas I’m including to sure worth shares, I favor to purchase PANW on 10% to fifteen% inventory value weak spot.

The important thing takeaway, nonetheless, is that I consider that PANW is among the finest tech shares cash should purchase, benefiting from secular progress, nice providers and capabilities, and potential progress expectations that warrant a “lofty” valuation.

Takeaway

Regardless of my deal with worth, Palo Alto stands out as a progress inventory value watching.

Regardless of its latest surge, PANW’s place within the cybersecurity trade, providing a complete suite of options, positions it properly amid the escalating menace of cybercrime.

The corporate’s deal with AI-driven cybersecurity and the success of XSIAM reveal a strategic strategy to evolving trade wants.

Financially strong, PANW reported robust Q1 outcomes, marked by important income progress, improved margins, and strategic acquisitions.

If I get a shopping for alternative in 2024, I’ll seemingly use it to considerably increase my tech-focused publicity.