Palo Alto Networks Bounces Back: A Closer Look at Its Financial Recovery

Palo Alto Networks‘ (NASDAQ: PANW) struggles earlier this year are starting to fade as the company reports strong earnings.

In February, the cybersecurity firm faced a significant decline in its stock price after announcing “spending fatigue” among customers and the launch of a new “platformization” strategy. This approach aimed to transition clients from standalone solutions to a comprehensive suite of the company’s products.

However, this change meant offering some products for free to encourage customers to switch from various isolated tools with differing contract terms. At the time, this was effectively about providing six months of free services.

This strategy resembles how streaming services offer discounted trials or how mobile providers buy out contracts to attract new users.

Now, let’s dive into Palo Alto’s fiscal first-quarter results, assess the effectiveness of its bundling services, and explore the stock’s potential future performance.

Positive Trends in Platformization

In fiscal Q1 2025 (which ended on October 31, 2024), Palo Alto’s platformization strategy showed promising results. The company added 70 new customers who are using its suite of security services, with around a third stemming from the acquisition of QRadar, a security information and event management platform from IBM. Palo Alto expects about half of QRadar’s clients to migrate to its extended security intelligence and automation management (XSIAM) platform by the end of the current fiscal year.

By the close of the quarter, the company had 1,100 platformized customers. The annual recurring revenue (ARR) from these clients grew by 6% during this time.

Palo Alto aims to achieve between 2,500 and 3,500 service-bundling agreements by fiscal 2030 and believes it is on track to meet this ambitious target. Management is confident that the cybersecurity market will eventually favor fewer comprehensive platforms over numerous isolated solutions.

Overall, revenue for the first quarter increased by 14% year-over-year, reaching $2.14 billion. This figure slightly surpassed the company’s prior revenue projection of $2.1 billion to $2.13 billion. Service revenue rose by 16%, subscription revenue surged by 21%, while support revenue increased by 8%. Product revenue grew by 4%. The company now forecasts FY 2025 revenue growth of about 14%, estimating a range of $9.11 billion to $9.17 billion, up from the earlier guidance of $9.1 billion to $9.15 billion. They anticipate adjusted earnings per share (EPS) between $6.26 and $6.39, an improvement from the previous estimate of $6.18 to $6.31, indicating a growth of 10% to 13%.

Below is a chart outlining the company’s updated guidance.

Data source: Palo Alto Networks.

Palo Alto’s guidance for fiscal Q2 suggests revenue growth of 12% to 14%, predicting revenues between $2.22 billion and $2.25 billion. It also anticipates adjusted EPS growth of 5% to 6%, estimating a range of $1.54 to $1.56.

Additionally, the company plans a 2-for-1 stock split, effective in mid-December. This move places Palo Alto Networks alongside other significant companies like Walmart, Nvidia, and Chipotle Mexican Grill, which have also executed stock splits recently. Typically, a split makes shares more affordable to a broader range of investors, potentially increasing trading activity. Shareholders will receive an additional share for every share they own following market close on December 13.

Image source: Getty Images.

Is Now the Right Time to Buy Palo Alto Stock?

Though Palo Alto is in the midst of implementing its service bundling strategy, it appears to be yielding positive results. Some concerns about pricing discounts during the platform transition exist, but ultimately, the company needed to adjust its strategy, and larger deals are now taking shape.

Customers with a patchwork of cybersecurity point solutions were finding these setups less effective, seeing diminishing returns on investments. With a solid base of legacy firewall clients, transitioning them to a consolidated cybersecurity platform is crucial for future growth. The company’s next-generation security solutions performed well, with next-generation ARR rising by 40% in the last quarter.

Palo Alto stock currently carries a forward price-to-sales ratio (P/S) of over 14 times the expectations for fiscal 2025, all while predicting 14% revenue growth.

PANW PS Ratio (Forward) data by YCharts

While growth may accelerate as the initial challenges of the platformization strategy soften, the current valuation seems high given the projected growth.

I consider Palo Alto a potential long-term winner, but I would advise against buying at the current stock price.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Nvidia, and Walmart. The Motley Fool recommends International Business Machines and Palo Alto Networks, and it has recommended the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not represent the views of Nasdaq, Inc.