PANW stock is surging amid cybersecurity demand, but key risks remain

Palo Alto Network stock has gone parabolic this year, helped by the belief that the ongoing AI boom will lead to more demand for cybersecurity tools. PANW jumped to a record high of $332, up by 137% from its lowest level this year. Its market capitalization has jumped to over $270 billion.

Palo Alto Networks stock is soaring amid soaring cybersecurity demand

Palo Alto Networks and other cybersecurity stocks have been in a strong bull run this year. Fortinet stock jumped to a high of $157, up by over 97% this year, while CrowdStrike has jumped by 62%. Other similar companies like Okta and SentinelOne have soared.

The surge is happening as investors remain optimistic about its prospects. Arete Research hiked its target from $185 to $433, while William Blair reiterated the rating to outperform. 

Some of the other top investment banks, like Goldman Sachs, Susquehanna, and Piper Sandler, have all maintained a bullish outlook. The average target among analysts is $311, down slightly from the current level.

The general view among analysts is that the company’s tools will see more demand in the AI era. This urgency jumped after Anthropic released Mythos, its most advanced model.

The most recent earnings report showed that Palo Alto’s revenue jumped by 31% in the third quarter to $3 billion. This revenue growth included $388 million from CyberArk, the company it acquired in a $25 billion deal. 

A look beneath the surface shows that the next-generation security ARR jumped by 60% YoY to $8.1 billion, while the Remaining performance obligation (RPO) soared by 36% to $18.4 billion. 

Palo Alto Networks now expects that its next-generation ARR will jump to between $8.9 billion and $8.95 billion this year, an increase of 60%. Its revenue is expected to grow by 25% this year. While this double-digit growth rate is impressive, the main challenge is that it is boosted by CyberArk, a sign that the organic revenue growth is not all that strong.

Valuation concerns remain

There is no doubt that demand for cybersecurity solutions is rising and that Palo Alto Networks will continue being the most dominant player. However, there are now concerns about its valuation. 

Data shows that the forward price-to-earnings ratio of 80, much higher than the sector median of 23. It is also higher than the five-year average of 23. 

Notably, the company’s rule-of-40 shows that it is a bit overvalued. It has a net profit margin of 8% and a forward revenue growth of 24%, giving it a multiple of 33%. This is notable because its revenue growth estimate includes CyberArk, its recent buyout.

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Palo Alto Networks stock technical analysis

The daily chart shows that the PANW stock has been in a strong bull run in the past few months. It recently crossed the important resistance level of $302, the highest swing on June 1. Moving above that level invalidated the double-top pattern. 

The risk, however, is that it has become highly overbought as the Relative Strength Index (RSI) has moved to 77.62. Also, the Stochastic Oscillator and other oscillators have continued rising. The stock remains above all moving average, with the 100-day EMA being at $223. 

Therefore, there is a risk that the overbought stock will suffer a mean reversion. If this happens, it will drop to the key support level of $300.