The U.S. stock market has been on a winning streak in 2024, with the technology-heavy Nasdaq Composite index topping the 20,000 mark. A major part of this rally can be attributed to the rapid adoption of artificial intelligence (AI) across industries and functions.
The AI wave is far from over. Enterprises worldwide are increasingly shifting their focus from AI-optimized infrastructure to complex AI applications.
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Historically, major technological innovations -- the internet and dot-com booms, advancements in personal computing and enterprise software, mobile and smartphone revolution, and the ushering of the cloud computing era -- led to prolonged expansion phases for the stock market. Similarly, considering the huge transformational potential of AI technologies, the S&P 500 and the Nasdaq Composite may also continue their upward momentum in 2025.
The average length of a Nasdaq bull rally is nearly 3.8 years, or 46 months. While the actual length of a bull rally depends heavily on broader economic conditions, educated guesses can be made, based on historical trends. Since the current bull market commenced on Oct. 12, 2022, the average length of a Nasdaq rally would carry through August 2026. In this kind of market, it may make sense to pick a stake in a high-quality technology stock.
Cybersecurity-giant Palo Alto Networks (NASDAQ: PANW) seems to be a smart choice now. The company executed a 2-for-1 stock split on Dec. 16, which makes the stock more accessible for investors and potentially expands the shareholder base. Although a stock split doesn't change the fundamental value of a company, the increased liquidity generally translates into share-price gains.
Here are other reasons why the company's stock price is well-positioned to grow even higher in the coming months.
The success of the platformization strategy
Cyber risks to government and critical infrastructures worldwide are increasing at an unprecedented pace. Additionally, AI-powered cyberattacks emerged as a potent challenge worldwide. Not surprisingly, the estimated cost of cybercrime worldwide may rise by 69.4% to a peak of $15.6 trillion by 2029.
Furthermore, according to Gartner, 75% of company security executives are keen on opting for a vendor consolidation strategy. But only 15% of large-enterprise customers have a unified security platform, so there's still much room for growth.
Palo Alto's platformization strategy (which involves consolidating multiple cybersecurity solutions across network security, cloud security, and security operations in a single offering) has proved effective in helping the company capture a significant part of this ever-growing opportunity. The company consolidates multiple security data points from disparate sources, analyzes them with precision AI technology, and then automates the entire remediation and resolution workflow.
Platformization has been a key force driving the growth of Palo Alto's next-generation security (NGS) portfolio, which comprises cloud-native and subscription-based solutions to protect the cloud, network, and endpoints. In the first quarter, NGS reported a 40% rise in annualized recurring revenue (ARR, a metric calculating annual run rate) to over $4.5 billion.
The platformization strategy is playing a critical role in expanding Palo Alto's customer base. This is evident as the company added 70 new clients in the first quarter of fiscal 2025 (ending Oct. 31, 2024), bringing the total count of platformized customers to 1,100.
The company is also securing large deals, with 305 deals worth over $1 million, up 13% year over year, and 60 deals over $5 million, up 30% year over year in the first quarter.
The strategy also helped boost the effectiveness of the company's cross-selling capabilities, helping build a sticky customer base. Palo Alto's cyber-security offering caters to clients' multiple security needs, so it gets deeply entrenched in the latter's operations. This dramatically reduces the chances of customers switching to competition as it involves a high risk of business disruption.
Margin expansion
Palo Alto has managed to control the cost of goods sold (COGS) by entering into lucrative deals with two large cloud providers. The company has also controlled the cost of sales through its platformization strategy. Finally, AI-powered copilots are also helping in customer-support automation.
Subsequently, Palo Alto's first-quarter operating margins improved by 60 basis points year over year to 28.8%, despite a slight slowdown in revenue-growth rates. The company expects further margin improvement in the coming years.
AI initiatives
Palo Alto is leveraging automation and AI technologies, combined with a robust data strategy, to improve its security capabilities. The company has made its AI-powered assistant Strata CoPilot generally available across its three security platforms -- network security, cloud security, and security operations. Trained on around 50,000 vetted sources, Strata is helping both clients and the company's customer service make fast decisions to resolve security challenges.
Additionally, Palo Alto is securing over 750 AI applications with its AI-powered security solutions. It has also integrated advanced AI capabilities in its Cloud Detection and Response (CDR) solution. This has enabled the company to sell millions of CDR agents since its launch in April 2024.
Palo Alto released over 400 new machine-learning detection modules to strengthen its Security Operations Center (SOC) capabilities. This, in turn, is helping the company create a base of over 150 active customers for its Extended security intelligence and automation management (XSIAM) platform, of which over 40 have more than $1,000,000 in ARR.
Valuation
Palo Alto is currently trading at only four times trailing-12-month sales, far less than the company's historical five-year average price-to-sales ratio (P/S) of 11.38x. This can be partly attributed to the decline in the top-line growth rate and increasing competition for the company.
However, considering the strong tailwinds, increasing business momentum, and AI-powered tailwinds, it makes sense to take at least a small stake in this cybersecurity stock.
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Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
