Palo Alto Networks: Riding the Wave of Nasdaq’s Bull Run

The Nasdaq Composite has been experiencing a powerful rally recently, fueled by a recovering economy, advancements in artificial intelligence (AI), and recent interest rate cuts from the Federal Reserve Bank. After a remarkable 43% surge in 2023, the index has gained approximately 33% thus far this year, indicating potential for further growth in 2025.

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Typically, bull markets last an average of five years. With the current rally passing its second anniversary in October, investors may see more upward movement ahead.

Historically, when the Nasdaq climbs 30% or more one year, it grows by an average of 19% the following year. This trend bodes well for investors looking ahead.

Another contributor to the market’s strength is the resurgence of stock splits among investor-favorite companies. As Palo Alto Networks Palo Alto Networks (NASDAQ: PANW) exemplifies, robust financial performance often leads to stock splits, prompting renewed investor interest.

Over the past decade, Palo Alto Networks’ stock has skyrocketed by roughly 768%, with a 23% gain over the past year alone, leading to a recent 2-for-1 forward stock split completed this month.

Despite recent successes, indicators suggest that Palo Alto’s impressive trajectory may continue into 2025. Here’s why.

Image source: Getty Images.

Revolutionizing Cybersecurity Solutions

Palo Alto Networks has made bold moves to transform the cybersecurity landscape, notably this past year. The company sought to streamline client experiences by encouraging the shift from multiple disjointed security solutions to a single, unified platform.

Clients often hesitate to consolidate their cybersecurity tools due to various contractual commitments. Early termination of these agreements often incurs penalties.

Palo Alto addressed this by providing complimentary services to clients, encouraging them to transition their operations onto its platform.

Initially, some investors were skeptical about this approach; however, management understood that the lifetime value of customers using multiple platforms greatly exceeded that of those using only one. Customers on three platforms had a lifetime value 40 times higher than those on a single platform.

By offering these free services temporarily, Palo Alto anticipates significant long-term gains, which has adjusted investor sentiment positively.

In the first quarter of fiscal 2025, which ended on October 31, revenue rose 14% year-over-year to $2.1 billion, and earnings per share (EPS) increased by 77% to $0.99. Particularly notable was the annual recurring revenue from next-generation security (NGS) services, which skyrocketed by 40% to $4.5 billion. This suggests that many customers are accepting Palo Alto’s offerings.

Additionally, management increased its full-year revenue forecast to $9.15 billion, marking a 14% growth. They also projected adjusted EPS of $6.34, an 11% increase at the midpoint of their guidance. NGS annual recurring revenue guidance rose by 32% to $5.55 billion.

Favorable Outlook from Wall Street

It’s often rare for Wall Street to reach a consensus, making it significant that most analysts hold a positive view of Palo Alto. Currently, of the 54 analysts covering the stock, 76% have issued a buy or strong buy rating, and there are no sell recommendations. An average price target of around $204 indicates an 8% potential increase from last Thursday’s closing price.

Recently, Jefferies analyst Joseph Gallo showcased strong support for Palo Alto, maintaining a buy rating and setting a new price target of $240, suggesting a potential 27% gain. He emphasized strong fundamentals, predicting cybersecurity stocks’ resilience moving forward.

While some may be concerned about Palo Alto’s high valuation—currently at 49 times earnings and 16 times sales—the price/earnings-to-growth ratio (PEG) remains attractive at 0.14, indicating it may be undervalued according to common standards.

Furthermore, Palo Alto’s performance in the past five years has vastly outpaced the broader market, gaining 385% compared to the S&P 500’s 86% increase.

Given this context, indications suggest that Palo Alto Networks is positioned as a promising investment choice.

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Danny Vena has no position in any of the stocks mentioned. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.

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