Should I Buy Palo Alto Networks Stock?

Palo Alto Networks (NASDAQ: PANW) is one of the leading cybersecurity companies. Its legacy online security products and updated offerings have helped make it a critical provider in this industry.

Unfortunately for Palo Alto, the competitive nature of the online security industry means organizations have numerous choices when it comes to providers. Amid that competition, the question for investors is whether Palo Alto stock can drive outsize returns, or whether they should look to other cybersecurity stocks.

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The state of Palo Alto Networks

Palo Alto has made itself one of the leaders in the crowded but critical cybersecurity industry. Consequently, prospective customers and investors may choose this company merely for that reason.

Another factor is the state of the overall industry. Fortune Business Insights forecast the compound annual growth rate (CAGR) of the cybersecurity industry at 14% through 2032. Thus, Palo Alto should benefit from that increased demand for the foreseeable future.

Moreover, competitors such as CrowdStrike or Zscaler stand out for one product type. In contrast, Palo Alto has taken a more generalized approach to cybersecurity despite the growing popularity of its next-generation firewall. With its approach, its growth slightly outpaced companies like Check Point Software and Fortinet but has underperformed compared to CrowdStrike and Zscaler.

That diversification is a mixed blessing in other areas, too. It would presumably place Palo Alto at the forefront of a trend for companies to source all cybersecurity products from one provider. However, investors soured on the stock early last year after Palo Alto offered some modules for free to give companies an incentive to purchase all cybersecurity services from the company.

Over time, the stock recovered to the point that it grew modestly over the past year, and it even initiated a 2-for-1 stock split. Still, Palo Alto's financials reflected some of the mixed feelings investors may have toward the stock, and the stock struggled to gain traction.

Palo Alto by the numbers

In the first quarter of fiscal 2025 (ended Oct. 31, 2024), revenue grew 14% compared to the same quarter in fiscal 2024. This may reflect the aforementioned industry CAGR, but it includes bright spots such as the annual recurring revenue for its next-generation firewall, which grew 40%.

Palo Alto also controlled the growth in operating expenses, limiting them to a 9% increase. Consequently, the $351 million in net income in fiscal Q1 was far above the year-ago profit of $194 million.

Furthermore, Palo Alto appears to be on track for more of the same. In fiscal 2025, the company forecasts 14% revenue growth. Still, it expects next-generation firewall ARR increases to slow to 31% or 32%. That growth may not necessarily translate into more investor interest. Investors may like its 48 P/E ratio, which appears attractive considering its industry and the net losses that many peers continue to report.

Still, from a price-to-sales (P/S) ratio standpoint, its stock is more expensive than all of its closest competitors except for CrowdStrike. Additionally, CrowdStrike grew revenue at 29% in its most recent quarter, more than double that of Palo Alto. Thus, Palo Alto's valuation may appear less appealing than its peers.

PANW PS Ratio data by YCharts

Should I buy Palo Alto Networks stock?

Under current conditions, Palo Alto stock does not look like a buy, at least compared to other cybersecurity stocks. Indeed, Palo Alto has matched the industry's growth, and given the rising demand for its services, it will likely continue to prosper as a business.

Unfortunately, other cybersecurity companies have outpaced its growth rate. Furthermore, its stock is comparatively expensive if measured by its sales multiple.

Amid those factors, Palo Alto stock is unlikely to outperform its peers for the foreseeable future. While its performance is sufficient to justify holding the stock, investors should probably refrain from adding shares at this time.

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Will Healy has positions in CrowdStrike and Zscaler. The Motley Fool has positions in and recommends Check Point Software Technologies, CrowdStrike, Fortinet, Okta, and Zscaler. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.