Palo Alto's Rebound Leads to a Stock Split Announcement. Can the Stock Keep Its Momentum Going?

Palo Alto's Rebound Leads to a Stock Split Announcement. Can the Stock Keep Its Momentum Going?

Palo Alto Networks' (NASDAQ: PANW) troubles early in the year are beginning to seem like a distant memory after the company once again posted solid earnings results.

The stock plunged in February after the cybersecurity company said it was seeing "spending fatigue" among its customers and embarked on a new "platformization" strategy. This strategy was designed to switch customers from point solutions to using a suite of the company's products.

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However, this move came at a price, as in order to entice customers to move away from a bunch of single-problem solutions from various vendors with different contract lengths, it agreed to give some of its solutions away for free so customers would not have to pay for duplicate programs. At the time, the company said this would be the equivalent of giving customers about six months of free product capabilities.

While a bold move, it is not all that dissimilar from streaming services offering customers highly discounted trial rates, or cellphone providers buying out contracts to obtain customers.

Let's take a closer look at Palo Alto's fiscal first-quarter results, how its strategy to bundle services is working, and whether the stock's momentum can continue.

Platformization momentum continues

Palo Alto's platformization strategy continued to show strong momentum in its fiscal 2025 Q1 (ended Oct. 31, 2024), with it adding 70 new customers using its suite of security services in the quarter. About a third of those came from the company's September acquisition of security information and event management platform QRadar from IBM. It is looking for half of QRadar customers to transition to its extended security intelligence and automation management (XSIAM) platform by the end of its current fiscal year.

It ended the quarter with 1,100 platformized customers. It also said that the annual recurring revenue (ARR) from this group of customers increased by 6% in the quarter.

The company is looking to have between 2,500 and 3,500 service-bundling deals by fiscal year 2030 and said it is on track to accomplish this goal. Palo Alto management said it believes that in the coming years, the cybersecurity market will have fewer platforms and that point solutions will eventually get subsumed by these winning platforms.

Overall, Palo Alto's fiscal first-quarter revenue climbed 14% year over year to $2.14 billion, which was just ahead of the company's guidance for revenue of between $2.1 billion and $2.13 billion. Service revenue increased 16%, with subscription revenue jumping 21% and support revenue up 8%. Product revenue rose 4%. It forecast fiscal 2025 revenue to grow by about 14% to a range of $9.11 billion to $9.17 billion, up from prior guidance of $9.1 billion to $9.15 billion. It projected adjusted earnings per share (EPS) of between $6.26 and $6.39, up from a previous outlook of between $6.18 and $6.31, representing growth between 10% and 13%.

Below is a chart of the company's guidance revisions.

Data source: Palo Alto Networks.

For fiscal Q2, Palo Alto management guided for revenue growth of between 12% and 14% to a range of $2.22 billion and $2.25 billion. It is looking for adjusted EPS growth of between 5% and 6% to a range of $1.54 to $1.56.

The company also announced a 2-for-1 stock split that will become effective in mid-December. Palo Alto Networks is the latest company to initiate a split this year, joining companies ranging from Walmart to Nvidia to Chipotle Mexican Grill. Generally, a stock split makes share prices more accessible to a wider range of investors and can lead to increased trading activity. After the market closes on Dec. 13, Palo Alto shareholders get an additional share for each share they own.

Is it time to buy Palo Alto stock?

While Palo Alto is still going through a transition period as it implements its service bundling strategy, it does appear the strategy is paying off. While there is some worry about the company discounting pricing as it platforms customers, at the end of the day it needed to make this move and deals are getting larger as a result.

A mishmash of cybersecurity point solutions was becoming less effective for customers who were starting to see diminishing returns on their cybersecurity investments. Palo Alto has a large base of legacy firewall customers, so getting them onto a more effective cybersecurity platform will be a key driver in the years ahead. The company's next-generation security offerings are making nice strides, with next-gen ARR up 40% in the quarter.

Palo Alto stock trades at a forward price-to-sales ratio (P/S) of over 14 times fiscal 2025 estimates for a company projecting to grow revenue by 14%.

While I would expect growth to begin to accelerate as the headwind from its platformization strategy eventually shifts to a tailwind, the valuation is still pretty pricey given its growth outlook.

While I think the stock will be a long-term winner, I would not look to chase the stock at these levels.

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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 recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.