Cybersecurity companies are often scrutinized differently than other software companies. Unlike other products that can make life easier but aren't necessary, cutting cybersecurity spending from the budget can be dangerous. As a result, cybersecurity stocks tend to be popular investments, since they have the benefits of being a higher-margin business but also have the staying power of vital business software.
One popular pick in this space is Palo Alto Networks (NASDAQ: PANW), a company that is set to split its stock on Dec. 16. With an impending stock split, many investors may be wondering if Palo Alto Networks is a good buy right now, especially since cybersecurity stocks are a popular investing space.
Palo Alto is growing its next-generation business, but also has legacy ones
Palo Alto Networks isn't a new kid on the cybersecurity block. It has been around since 2005, which is fairly old by cybersecurity standards. Palo Alto Networks isn't a niche cybersecurity company; it has a wide product array and has taken the strategy of what it calls "platformization," where a single provider handles all cybersecurity needs. It says that IT experts Gartner (NYSE: IT) sees 75% of cybersecurity leaders using this strategy, but only 15% of enterprise customers have adopted this approach. As a result, there's a huge growth opportunity.
Palo Alto is also working on getting its clients to shift over from its legacy business model. It splits its business into three primary segments: Strata, Prisma, and Cortex. Prisma and Cortex are its "next-generation security" (NGS) platforms, which Palo Alto draws more attention to. Cortex uses artificial intelligence (AI) to help defend itself from cyberattacks, similar to its competitor CrowdStrike (NASDAQ: CRWD). Prisma is Palo Alto's cloud-based security, which protects cloud workloads. Strata is the legacy part of the business and mostly deals with managing a client's firewall.
Management is doing its best to sell investors on focusing on the NGS business segments, as these are seeing the most growth. In first-quarter fiscal year 2025 (ending Oct. 31), NGS' annual recurring revenue (ARR) rose 40% year over year to $4.5 billion. Management sees that segment slowing down throughout the year, as second-quarter ARR growth is projected to rise between 35% and 36%, with FY 2025 ARR growth expected to come in between 31% and 32%. With just that piece of information, investors might think Palo Alto is growing rapidly overall -- but it's not.
Total revenue rose 14% to $2.1 billion in Q1, so there are some issues with the other parts of the business, as this metric is far below NGS' ARR growth. Still, that doesn't mean Palo Alto isn't a strong business. Earnings per share (EPS) rose from $0.63 last year to $1.07 this year -- a 70% rise.
Alongside its earnings announcement came the news of a 2-for-1 stock split, which will cut the share price in half when it starts trading for its split-adjusted price on Monday, Dec. 16. Management is enacting the stock split because it feels that its current $400 per share price puts it out of the reach of some employees and investors.
Sometimes, stock splits can create some momentum for the stock, too, but is that enough of a reason to buy now?
The stock is far from cheap
Palo Alto isn't a very cheap stock, which is common among cybersecurity companies. With the stock trading for 64 times forward earnings and 17 times trailing sales, Palo Alto certainly sells at a premium compared to many businesses.
PANW PE Ratio (Forward) data by YCharts.
The momentum in the cybersecurity space is real. The question is, is Palo Alto Networks worth buying over some of its competitors? One of my favorite companies in this space is CrowdStrike, and it trades for a more expensive price tag: 97 times forward earnings and 24 times sales. However, CrowdStrike's entire business is devoted to what Palo Alto would define as Next-Generation Security, which makes it a far more attractive investment to me, especially because overall revenue grew 29% in its latest quarter.
As a result, I think I'll pass on Palo Alto's stock for now, as I already have a few investments in the cybersecurity space. But if you want to create a basket of cybersecurity stocks, I think Palo Alto could be a worthy addition.
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Keithen Drury has positions in CrowdStrike. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool recommends Gartner and 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.
