Artificial intelligence is a revolutionary technology, but without proper cybersecurity it can also pose serious threats to businesses.
Earlier this year, Palo Alto Networks (PANW -1.03%) reported a 10x increase in the frequency of email-based phishing attacks compared to the same period in 2023. The spike is linked to malicious actors using generative artificial intelligence (AI) to rapidly create realistic content to trick employees into handing over sensitive information.
This shift in tactics means businesses need to think differently about cybersecurity. Palo Alto is building AI into many of its products to make them faster and more automated, helping them combat AI-based threats. But some businesses are putting valuable data at risk by experimenting with AI in unsafe ways themselves, so Palo Alto is releasing new tools to help protect them, too.
Here's why investors with excess cash (money that they don't need for immediate expenses) should consider allocating $370 to Palo Alto shares and holding them for the next 10 years:
The leader in AI-based cybersecurity
Palo Alto's cybersecurity software portfolio spans three distinct platforms: cloud security, network security, and security operations, and the company is incorporating AI into as many products as possible within each category.
The Cortex XSIAM security operations solution is a great example: According to Palo Alto, 90% of security operations centers within organizations still rely on manual processes, and 23% of incidents go uninvestigated because human administrators can't keep up with the volume of alerts. XSIAM uses AI to automate incident response and remediation, and according to Palo Alto, more than 50% of customers have reduced their mean time to resolution (MTTR) from days to less than 10 minutes.
During fiscal year 2024 (ending July 31), the number of customers using XSIAM surged fourfold compared to fiscal year 2023, and bookings more than doubled to $500 million. That's a solid result considering the tool is only about two years old, and highlights the growing demand for AI-powered security.
But as we've said, Palo Alto is also committed to protecting its customers who are using AI. The company is introducing new tools to its network security platform, such as AI Access Security, which assigns risk scores to hundreds of third-party generated AI applications. AI Access shows admins how employees are using those apps to ensure secure deployments, and also provides data controls and the ability to block certain apps entirely.
Adoption couldn't be easier: AI Access will soon be available to all 5,000 existing Prisma Access customers. It's as simple as flipping a switch. With nearly 1,000 customers expressing interest during the pilot program, Palo Alto will soon be able to capture even more revenue from its existing users.
Image source: Getty Images.
Moving to a platform
Palo Alto is forecasting total revenue of $8 billion in fiscal year 2024, up 16% from the same period last year, which is a deceleration from fiscal year 2023, but there are signs of rapid growth lurking beneath the surface.
Palo Alto's annual recurring revenue (ARR) attributable to next-generation security (NGS) customers grew 43% to $4.2 billion in the fourth quarter. NGS refers to “platformized” customers, which are customers that have migrated most (or all) of their cybersecurity stack to Palo Alto.
Historically, the cybersecurity industry was fragmented with many vendors specializing in specific products, forcing companies to piece together a security stack from multiple sources. This could lead to unacceptable vulnerabilities, so providers like Palo Alto and CrowdStrike are now focused on “platformizing” their customers.
Palo Alto says the lifetime value of a customer who uses all three of its platforms is 40 times higher than one who uses just one. That's a big opportunity, so Palo Alto is offering many customers fee-free periods to help them migrate away from their existing cybersecurity providers. That's the main reason the company's total revenue growth has slowed recently.
But in the long run, this strategy can pay off big time.
Why Palo Alto Stock is Worth a Long-Term Investment
Palo Alto believes it can more than triple NGS revenue to $15 billion by 2030, because the company expects as many as 3,500 of its top 5,000 customers to adopt a platform approach to cybersecurity by then. Most of the revenue will be recurring, giving Palo Alto's business predictability for investors.
Palo Alto's stock is currently trading at a price-to-sales multiple of 15.4, 23% cheaper than its main rival, CrowdStrike.
PS Ratio Data by YCharts
CrowdStrike has consistently grown total revenue by more than 30%, so its shares might be worth a small premium under normal circumstances. But investors should consider two things:
Palo Alto's NGS revenue grew 43% in the most recent quarter, and its NGS ARR of $4.2 billion exceeded CrowdStrike's total ARR. CrowdStrike just experienced one of the most high-profile outages in history, costing customers an estimated $5.4 billion. The company is likely hit hard, but the extent of it won't be known until it releases its latest financial results on Wednesday, August 28th.
Therefore, I would argue that Palo Alto's stock deserves to trade at a higher price than it is now. The company's current valuation looks like a great entry point for investors, especially those who can stay the course through the next decade as the company benefits from platformization.
