Shares of Palo Alto Networks have risen a decent 17% so far in 2024 lagging just behind the S&P 500’s 19% rise.
The Santa Clara, Calif.-based cybersecurity provider recently delivered an expectations-beating quarterly report for its fiscal year 2024 fourth quarter — which ended in July. Those earnings figures sent the stock up some 8%, according to the Wall Street Journal.
Underlying that success was a combination of relief from investors who apparently overreacted to the company’s February warning that it might give away some services and the company decision to change the date of its August earnings announcement.
With the customer uptake of the company’s platformization strategy, investors are warming to the stock. In 2023, one of its rivals — cloud security service provider, Wiz — told me customers were swarming to Wiz because of Palo Alto Networks’ failure to integrate its many cybersecurity acquisitions, according to a March 2023 Forbes post.
Platformization solves this problem for customers, according to analysts. What’s more, artificial intelligence has the potential to deliver expectations-beating revenue growth.
How so? Palo Alto Networks is incorporating the technology into its offerings to improve the customer experience, according to my September 11 interview with chief product officer Lee Klarich.
If Palo Alto Networks’ customers buy more from the company, revenues could grow faster than investors expect — sending company shares higher.
Palo Alto Networks’ 3 Lines of Business
Palo Alto Networks’ offers three main services:
- Network security. “We scan and secure any connections between users and applications,” Klarich told me. “We make sure nothing bad is happening. We make sure employees are not sending sensitive information and every employee can access every application.”
- Cloud security. “About 10 years ago, more applications moved to the cloud — Azure, AWS, Google Cloud, and Oracle Cloud,” he said. Startups developed numerous point products. To make those cloud solutions available to customers, Palo Alto Networks acquired many of the startups — 17 since 2017, Klarich noted.
- Security operations. The company’s centers “monitor what is happening and detect when an attack comes through,” Klarich told me. The SOC ingests incoming data to detect potential attacks — then moves to investigate, respond, and prevent them, he added.
Platformization Solves A Strategic Problem For Palo Alto Networks
The delayed integration of Palo Alto Networks’ cloud security acquisitions created opportunities for rivals. “Palo Alto Networks acquired the best startups in security,” Wiz CEO Assaf Rappaport told me in a March 2023 interview.
Palo Alto Networks’ acquired startups did not serve customers well. “From the customer’s perspective it offers a Frankenstein mashup,” said Rappaport. “It is hard to deploy, hard to use, and more noisy than Wiz’s products.”
Wiz gives customers more for their money. Companies prefer Wiz because it is well-integrated, easy to deploy and use, and gives companies accurate and actionable insights, he added last year.
Platformization solves this problem, says Palo Alto Networks. “We created a cloud security platform that integrated the point products all in one place on multiple cloud and hyperscalers,” Klarich told me last week.
“In the decision to purchase our products, several executives get involved. These include the chief information security officer, chief information officer, chief technology officer and ultimate the chief financial officer comes in to negotiate. The technical decision is the key.”
Palo Alto Networks prevails in the competition to meet customer needs. “While the criteria vary by the situation, they generally include how the company approaches innovation, whether the solution is real-time or manual, the solution’s ease of adoption and get most out, and whether it takes advantage of AI,” Klarich said.
“We win because of platformization which makes our services easier to deploy. And we are better at innovation — we understand the customer’s problems and solve them in an innovative way,” he added.
Palo Alto Networks’ Expectations-Beating Report
Palo Alto Networks topped fiscal fourth quarter revenue and earnings expectations while raising the company’s guidance above consensus. Second half bookings grew faster than analysts forecast due to Palo Alto Networks’ successful launch of platformization.
Here are the key numbers:
- Fiscal year 2024 fourth quarter revenue: $2.2 billion — up 12% from the year before and $40 million ahead of analysts’ expectations, according to Investor’s Business Daily.
- FY 2024 Q4 cloud computing annual recurring revenue: $4.22 billion — up 43% and $120 ahead of estimates, IBD noted.
- FY 2024 Q4 remaining performance obligations: $12.7 billion — up 20% and $100 million below estimates, IBD reported.
- FY 2024 Q4 adjusted earnings per share: $1.51 per share — up 5% and 10 cents ahead of estimates, according to IBD.
- FY 2025 Q1 revenue estimate: A range between $2.10 billion and $2.13 billion, the midpoint of which is $15 million more than the consensus, wrote IBD.
Will AI Contribute To PANW Stock Growth?
Palo Alto Networks seeks to stay ahead of customers’ evolving needs. Sometimes the company makes acquisitions and other times it develops products internally. “We are very focused on organic innovation and recognize inorganic is an approach we should take,” Klarich said. The company varies the method depending on “what is best for the customer,” he added.
Palo Alto Networks uses AI in many of its services — anticipating customers will buy more because AI helps the company block cyberattacks. “We write code to make products safe for our customers,” he said. “AI detects and prevent cyberattacks.”
Launched in May 2024, Palo Alto Networks’ Precision AI service uses “machine learning, deep learning and generative AI to ensure real-time security and safety,” according to a company release.
Generative AI also makes Palo Alto Networks’ services easier for customers. “Through a Copilot, we make products easier to use so users can do more work.” Klarich told me. “It is embedded in the product with a natural language interface trained on the biggest cyberthreats,” he added.
Will AI contribute to PANW’s growth? “We launched three new products in July and August,” he said. “We are having lots of conversations with customers. It’s new and early days. They tell us we have exactly what they need. AI in products makes then better and easier to operate.”
What Analysts Expect For Palo Alto Networks
Palo Alto Networks made investors nervous at least twice this year. First, in February when the company told investors it might give away services for free and again in August when the company changed the date of its fourth quarter earnings announcement.
Analysts are now applauding the company’s platformization — which previously unsettled them.
In February, CEO Nikesh Arora warned investors during a second-quarter earnings call that tighter cybersecurity budgets might lead the company to give away products temporarily — sending the company stock down 28%, noted the Journal.
In August, Arora made some investors nervous again. That’s because the company decided to announce results late on a Monday instead of Friday as the company did the year before — which sent shares down 17% as Wall Street worried the fourth quarter report might “include troublesome numbers,” reported CNBC.
It seems Wall Street made much ado about nothing. Platformization has encouraged about 1,000 of Palo Alto Networks’ 5,000 largest customers to use several of the company’s services.
“I know there was significant consternation around our platformization strategy six months ago,” Arora told investors in August, according to the Journal. “All I want to say is, I wish we had started down that path sooner,” he added.
Analysts have good things to say about Palo Alto Networks’ cloud platform. “Palo Alto noted an acceleration in bookings in second half following the rollout of its platformization approach,” said Baird analyst Shrenik Kothari in a report featured by IBD.
“Management noted that the intensifying threat landscape and the proliferation of individual point products are driving the need for integrated platforms,” the Baird analyst noted.
Other analysts highlighted their enthusiasm for the company’s growth potential. Examples include:
- Growth in next generation cloud computing annual recurring revenue. “Next generation ARR had another very strong quarter, growing 43% year-over-year to $4.22 billion, led by strong demand across the board and now representing over 52% of Palo Alto’s total revenue,” noted William Blair analyst Jonathan Ho in a report featured by IBD.
- Rising RPO. “Management believes RPO is the best metric and therefore pivoted to guiding to it in place of billings,” wrote Jefferies analyst Joseph Gallo, according to IBD. “Management guided RPO to grow 19% to 20% year-over-year for both Q1 and fiscal 2025, implying an acceleration in bookings for both,” Gallo added.
If Palo Alto Networks’ new services boost the amount each customer buys from the company and helps bring in new customers, the stock could rise.