Palo Alto's Bounceback Propels Stock Division Declaration. Will the Shares Maintain Their Momentum?
Palo Alto Networks' (PANW 0.21%) challenges during the year's initial stages are gradually fading into oblivion after the company reported another series of commendable income figures.
The stock experienced a dramatic drop in February following the company's announcement that it was experiencing client expenditure fatigue and was embarking on a new "platformization" approach. This approach aimed to switch customers from utilization of standalone solutions to utilizing a variety of the company's products.
This move, however, came with its own set of costs. To entice clients to forsake multiple single-issue solutions from countless vendors with varied contract durations, the company agreed to offer some of its solutions for free, allowing clients to avoid paying for redundant programs. At the time, the company claimed this would be akin to granting clients approximately six months of free product functionalities.
This move, while bold, bears some resemblance to streaming services offering highly discounted trial rates or mobile service providers buying out contracts to acquire subscribers.
Let's delve deeper into Palo Alto's fiscal first-quarter results, examine the effectiveness of its strategy to combine services, and assess whether the stock's ascent can continue.
The platformization trend endures
Original guidance
Palo Alto's platformization strategy exhibited strong momentum during its fiscal 2025 Q1 (October 31, 2024), adding 70 new customers utilizing its security services in the quarter. Around a third of these new customers stemmed from the company's acquisition of IBM's security information and event management platform QRadar in September. The company hopes to have half of QRadar's customers transition to its extended security intelligence and automation management (XSIAM) platform by the end of its current fiscal year.
$9.10 billion to $9.15 billion
The company concluded the quarter with 1,100 platformized customers and reported that the annual recurring revenue (ARR) from this group of customers grew by 6% during the quarter.
13% to 14%
Palo Alto aims to have between 2,500 and 3,500 service bundling deals by fiscal year 2030 and is on track to achieve this target. Palo Alto management believes that in the coming years, the cybersecurity market will consist of fewer platforms, and point solutions will eventually merge into these triumphant platforms.
$6.18 and $6.31
Total revenue for Palo Alto's fiscal first quarter increased by 14% compared to the previous year to $2.14 billion, surpassing the company's projected revenue range of $2.1 billion to $2.13 billion. Service revenue rose by 16%, while subscription revenue soared by 21%, and support revenue expanded by 8%. Product revenue expanded by 4%. Palo Alto anticipates fiscal 2025 revenue to increase by approximately 14% to a range of $9.11 billion to $9.17 billion, up from its previous projection of $9.1 billion to $9.15 billion. Revenue growth was projected to be around 12% to 14% for fiscal Q2, while adjusted earnings per share (EPS) was expected to increase by 5% to 6%.
9% to 11%
Below is a chart displaying the company's revised guidance figures.
| Metric | Revenue | Revenue Growth | Adjusted EPS | EPS Growth || --- | --- | --- | --- | --- || Original guidance | $9.10 billion to $9.15 billion | 13% to 14% | $6.18 and $6.31 | 9% to 11% || New guidance | $9.11 billion to $9.17 billion | 14% | $6.26 to $6.39 | 10% to 13% |
New guidance
For fiscal Q2, Palo Alto management forecasted revenue growth of between 12% and 14% to a range of $2.22 billion and $2.25 billion. Adjusted EPS growth was anticipated to be between 5% and 6% to a range of $1.54 to $1.56.
$9.11 billion to $9.17 billion
Additionally, Palo Alto announced a 2-for-1 stock split that will take effect in mid-December. Palo Alto Networks becomes the latest company to initiate a split this year, joining a list of companies that includes Walmart, Nvidia, and Chipotle Mexican Grill. In general, a stock split makes stock prices more accessible to a broader range of investors and can lead to increased trading activity. Following market close on December 13, Palo Alto shareholders will receive an additional share for each share they own.
14%
Should you consider purchasing Palo Alto stock?
$6.26 to $6.39
Although Palo Alto is still navigating its transition phase as it implements its service bundling strategy, there are indications that the strategy is proving successful. Although there are concerns about the company offering pricing discounts as it platforms clients, ultimately, it was necessary to take this step, and deal sizes are growing as a result.
10% to 13%
A hodgepodge of cybersecurity point solutions was starting to lose its effectiveness for clients who were experiencing diminishing returns on their cybersecurity investments. Palo Alto has a substantial base of legacy firewall clients, so transitioning them to a more effective cybersecurity platform will be a critical factor in the years ahead. Palo Alto's next-generation security offerings are making substantial strides, with next-gen ARR increasing by 40% in the quarter.
Palo Alto stock trades at a forward price-to-sales ratio (P/S) of over 14 times fiscal 2025 estimates for a company that projects to expand revenue by 14%.
While I anticipate growth to start accelerating as the headwind from the platformization strategy eventually shifts to a tailwind, the valuation remains relatively expensive given the company's growth forecast.
Although I believe the stock will ultimately be a long-term success, I would not look to invest in the stock at current levels.
Given the success of Palo Alto Networks' platformization strategy, which has resulted in a 14% revenue increase and the addition of 70 new customers, the company is considering further investments in this area. This may involve allocating more funds towards finance and money, potentially through investing in research and development for new platform features.
The strategic shift towards platformization and the offering of some solutions for free to attract customers has had a impact on Palo Alto's financials. The company's revenue, particularly from service and subscription, has seen significant growth, but this move has also increased the company's expenses, a common challenge in the finance and investing landscape.
