Should Investors Buy This Hot Artificial Intelligence (AI) Stock Following Its Recent Surge?

Palo Alto Networks (NASDAQ: PANW) stock has delivered respectable gains of 30% so far this year, which is commendable considering that it started the year on a negative note and crashed big time in February after releasing its quarterly results.

Investors were selling the stock in droves at that time as the cybersecurity specialist reduced its full-year guidance. However, the stock has been recovering in recent months, and the company's latest quarterly results indicate that it may be able to deliver more gains to investors.

Palo Alto released its fiscal 2025 first-quarter results (for the three months ended Oct. 31) on Nov. 20. The company's numbers were ahead of consensus estimates, and it also raised its guidance for the full year. Additionally, management announced a 2-for-1 forward stock split, which will go into effect on Dec. 12.

Let's take a closer look at Palo Alto's latest quarterly performance and whether it makes sense for investors to buy the stock right now.

Key metrics suggest Palo Alto's moving in the right direction

Palo Alto's fiscal Q1 revenue improved 14% year over year to $2.14 billion, while non-GAAP net income jumped 13% to $1.56 per share. Analysts were looking for $1.48 per share in earnings on revenue of $2.12 billion.

Palo Alto rounded off its market-beating performance by raising its guidance. It now expects full-year earnings to land between $6.26 per share and $6.39 per share, compared to the earlier range of $6.18 per share to $6.31 per share. And it sees revenue increasing by 14% in fiscal 2025 at the midpoint, compared to the earlier expectation of 13.5%. The full-year revenue guidance of $9.12 billion to $9.17 billion is higher than analysts' expectations of $9.13 billion.

The company's stronger-than-expected earnings report and improved full-year guidance can be attributed to the healthy demand for its cybersecurity platform. Palo Alto management points out that customers are signing bigger deals with the company.

For instance, the number of customer accounts spending more than $1 million on Palo Alto's cybersecurity platform increased 13% year over year in the previous quarter to 305. The increase in customer accounts with transactions of more than $5 million increased at a greater pace of 30% to 60. Palo Alto attributes this increase in deal sizes to the growing adoption of cybersecurity platforms that integrate multiple tools into a single offering.

Palo Alto CEO Nikesh Arora remarked on the latest earnings conference call that the company's "approach is to ingest all relevant security data once, stitch and analyze this with precision AI technology, and natively automate end-to-end workflows." It's worth noting that Palo Alto has been upgrading its product portfolio to solve artificial intelligence (AI)-related use cases. Management points out that it is securing more than 750 AI-specific applications, a number that it says will keep growing.

The good part is that Palo Alto's AI-specific products generated annual recurring revenue of $250 million in the first quarter of fiscal 2025, which translates into an annual run rate of $1 billion. It won't be surprising to see this number head higher in the future. The adoption of AI in the cybersecurity market is expected to grow at an annual rate of almost 21% between 2024 and 2032, generating annual revenue of $121 billion at the end of the forecast period.

Palo Alto, therefore, is in line to take advantage of a massive opportunity that could help accelerate the company's growth in the long run. The good part is that the company's remaining performance obligations (RPO) indeed suggest that it has a brighter future. This metric refers to the total value of a company's contracts that will be fulfilled in the future, and it increased by 20% in fiscal Q1 to $12.6 billion.

The faster growth in the RPO compared to the actual revenue bodes well for Palo Alto, as it points toward sustained and healthy growth going forward. Moreover, Palo Alto estimates that it could end fiscal 2025 with a 19% to 20% increase in RPO, to $15.2 billion to $15.3 billion. Again, that would be faster than the estimated growth in the company's top line.

Is the stock worth buying after its recent rally?

Palo Alto Networks stock has jumped 46% since hitting a 52-week low on Feb. 21. The stock is now trading at 50 times trailing earnings thanks to this rally. That's expensive when compared to the tech-laden Nasdaq-100 index's trailing price-to-earnings ratio of 33. However, the good part is that Palo Alto's bottom-line growth is expected to improve.

Analysts forecast a 12% increase in the company's bottom line to $6.35 per share this year. The chart below tells us that it could deliver faster growth over the next couple of years.

PANW EPS Estimates for Next Fiscal Year data by YCharts.

However, don't be surprised to see Palo Alto clocking faster earnings growth in the future thanks to its strong revenue pipeline, and the larger deals the company is signing that could help it reduce customer acquisition costs and improve margins. Growth investors can still consider buying shares of Palo Alto, as a potential improvement in its growth rate could help justify its valuation.