What a difference a few months can make. In February, Palo Alto Networks (NASDAQ: PANW) saw its stock tank after the cybersecurity company said it was seeing "spending fatigue" among its customers, and it embarked on a bold new strategy.
Weeks later on its earnings call, rival CrowdStrike Holdings (NASDAQ: CRWD) took at jab at Palo Alto's large collection of single-problem solutions, saying: "Multi-platform hardware vendors evangelized their stitched-together patchwork of point products, masquerading as thinly veiled piecemeal platforms. ... It's the organization trapped in these fragmented pseudo platforms riddled with bolt-on point products that are the ones suffering from fatigue."
With Palo Alto reporting solid fiscal fourth-quarter results and issuing an upbeat fiscal 2025 outlook, and CrowdStrike dealing with the aftermath of a widespread outage last month, the tides in the cybersecurity industry have certainly shifted.
Palo Alto's strategy is gaining momentum
The big strategy change that Palo Alto undertook was to try to move customers away from a patchwork of tied-together single-problem solutions from various vendors onto one of its three integrated primary platforms, in what it referred to as its "platformization" strategy.
In order to accomplish this, however, the company decided to let customers use some of its services for free while they had contracts in place with other cybersecurity providers, since customers wouldn't want to pay for duplicate services.
At the time, the company said this new strategy would be the equivalent of giving customers approximately six months of free product capabilities and that it would pressure revenue and billings growth over the next 12 to 18 months.
Six months into its new strategy, things appear to be going well. It added 90 new platformizations in the quarter, up from 65 additions last quarter. Well over 1,000 of its 5,000 largest customers are now on a platform. These platforms are custom collections of cybersecurity tools, presented together in a manageable format with a unified management system. They offer centralized control and streamlined processes, helping clients achieve stronger data security shields without adding a ton of additional security staff.
Its annual recurring revenue per "platformized" customer, meanwhile, has risen 10% since the first quarter, showing the lift it is getting from transitioning customers from specific point solutions to a security platform, and single-platform customers to multiple platforms.
Overall, Palo Alto saw fourth-quarter revenues rise 12% to $2.2 billion. Service revenue grew 18%, with subscription revenue climbing 23% and support revenue up 10%. Product revenue declined 5%.
The company forecast fiscal 2025 revenue to grow between 13% to 14% to a range of $2.1 billion to $2.13 billion. It is looking for adjusted earnings per share (EPS) between $6.18 and $6.31, representing growth between 9% and 11%.
For the 2025 fiscal first quarter, it guided revenue growth between 12% and 13% to between $2.10 billion and $2.13 billion, and adjusted EPS growth between 7% and 8% to a range of $1.47 to $1.49.
Palo Alto said it is seeing more customer interest around its Cortex platform, following the CrowdStrike outage.
Image source: Getty Images
Is it time to buy Palo Alto stock?
Clearly, the best time to buy Palo Alto stock was immediately after it was slammed following its second-quarter results; the stock is now back to where it had been before it introduced its new platformization strategy. The company is executing this strategy, although it's still not growing its revenue in the high-teen percentages like it was projecting before its reset in February.
The company is on track, but the rebound in the share price has left it with a hefty valuation. It now trades at a forward price-to-sales ratio (P/S) of over 13 times fiscal 2025 estimates for a company projecting to grow revenue by 13% to 14%. That's a very high valuation and well above where the company has traded in the past couple of years, even though revenue growth was projected to be higher back then.
PANW PS ratio (forward one year); data by YCharts.
At the end of the day, Palo Alto stock is up mostly from resetting the bar lower and then jumping over it. While this is often a recipe for near-term stock success, its valuation has gotten too frothy for me at the moment. As such, I would bet against the recent bullish trend and stay away from this cybersecurity stock.
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike and Palo Alto Networks. The Motley Fool has a disclosure policy .
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