The S&P500 is the most widely recognized stock market index in the US, consisting of the country’s 500 largest companies. Given the extensive reach of its member companies, it is considered by many to be the most reliable gauge of the overall performance of the stock market. To be included in the S&P 500, a company must meet the following conditions:
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Be based in the US
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Have a market capitalization of at least $18 billion
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Be very fluid
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At least 50% of the outstanding shares must be available for trading
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Must be profitable under generally accepted accounting principles (GAAP) in the most recent quarter
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In total, they must be profitable over the previous four quarters
Palo Alto Networks (NASDAQ: PANW) has been a member of the S&P 500 since June 2023, but the cybersecurity specialist recently announced a 2-for-1 stock split. This is typically the vision of a company with years of strong operational and financial results, and Palo Alto fits that bill perfectly. Since its initial public offering (IPO) in mid-2012, Palo Alto shares have risen 2,080% as the company has been a major player in the evolving cybersecurity market. These results are also not relegated to the distant past. Over the past five years, Palo Alto shares are up 368% (at time of writing).
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Despite the impressive gains, many on Wall Street believe there is still a long way to go. Let’s take a look at what’s driving Palo Alto’s current success and what the future holds.
Palo Alto has long been known for its disruptive innovations in cybersecurity. However, it’s the company’s more recent history that should be of interest to investors. In an effort to keep customers from using a patchwork of one-off solutions, Palo Alto made a bold move earlier this year that shook up the industry with what amounted to a major shift in strategy.
One of the biggest hurdles customers face when adopting a single security platform is using multiple providers with a range of contractual end dates, which sometimes prevents them from switching to a unified vendor. To address these challenges, Palo Alto offered customers free services to consolidate their services on one of its security platforms.
Management noted that the lifetime value of customers using two of its platforms was more than five times that of those on a single platform, a figure that is up to forty times greater for customers on three platforms. By offering customers to ‘pay’ to make the switch and take a short-term financial hit, Palo Alto is laying the foundation for a a lot of more profitable future. Although investors were initially skeptical, the company’s growth has recovered faster than investors expected.
For the first quarter of fiscal 2025 (ended October 31), the company generated revenue of $2.1 billion, up 14% year-over-year, while earnings per share (EPS) of $0.99 rose 77%. As if that wasn’t enough to get shareholders’ attention, annual recurring revenue (ARR) from the next generation security services (NGS) business – the fast-growing business – grew 40% to $4.5 billion. This illustrates that management’s controversial strategy is paying off.
Due to the robust results, management has raised its expectations. For the full fiscal year, Palo Alto expects year-over-year revenue growth of 14% to $9.15 billion. This would result in adjusted earnings per share of approximately $6.34, up 11%, and NGS ARR of $5.55 billion, up approximately 32%.
Wall Street is notorious for its wide range of opinions, so it’s worth noting that the majority of analysts covering Palo Alto agree that profits are still ahead. Of the 54 analysts who have weighed in so far in November, 76% maintain a buy or strong buy rating, with none recommending sell. Furthermore, an average price target of around $409 represents a potential upside of 6% from Monday’s closing price. These price targets are starting to move higher in the wake of Palo Alto’s better-than-expected financial results.
However, Evercore ISI analyst Peter Levine is already more bullish than his Wall Street peers, maintaining an outperform (buy) rating and a Street-high price target of $455. That indicates a potential gain for investors of 18% compared to Monday’s closing price. Noting that the company is closing larger deals, the analyst cited channel reviews that sounded “significantly more positive, with a strong emphasis on solid execution across the board,” Levine wrote in a note to clients.
The only stumbling block investors face is the stock’s frothy valuation. Palo Alto Networks is currently selling for 50 times earnings and 17 times revenue, which seems ridiculously expensive. However, the price/earnings growth ratio (PEG), which explains the accelerating growth, comes in at 0.14, while any number less than 1 is the norm for an undervalued stock.
It’s also important to remember that Palo Alto Networks has outperformed the broader market with: wide margin over the past five years, generating a gain of 369%, about four times the return of the S&P 500.
Looking through that lens, I’d say Palo Alto Networks is a buy.
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Danny Vena has no positions in any of the stocks mentioned. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
Meet the newest Stock-Split stock in the S&P 500. It’s up 2,080% since its IPO, and Wall Street says it’s now a buy. was originally published by The Motley Fool
