Palo Alto Networks, Inc. PANW continues to command a premium in the cybersecurity market, with its stock trading at a forward 12-month price-to-earnings (P/E) ratio of 51.31, significantly above the Zacks Internet – Software industry average of 34.91. Its forward 12-month price-to-sales (P/S) ratio of 11.26 also far exceeds the industry average of 2.96.

Forward 12-Month P/S Multiple

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While this elevated valuation reflects investor confidence in the company’s long-term potential, it also raises concerns about whether the stock can justify such lofty multiples, especially amid near-term challenges.

Why Did Palo Alto Underperform Recently?

Over the past three months, Palo Alto Networks stock has declined 10.4%, underperforming the industry’s gain of 4%. The stock has also underperformed major cybersecurity players like CrowdStrike Holdings, Inc. CRWD, Fortinet Inc. FTNT and CyberArk Software Ltd. CYBR.

CRWD, FTNT and CYBR shares have rallied 13%, 13.5% and 15.2%, respectively, over the past three months. This lackluster performance was due to slowing revenue growth, which has raised investor concerns about the company's near-term prospects.

3-Month Price Return Performance

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In fiscal 2024, Palo Alto Networks’ revenues grew 16% year over year, a sharp deceleration from the 25% growth it recorded in fiscal 2023. For fiscal 2025, the company expects revenues to grow by just 14%, with a range of $9.12 billion-$9.17 billion. Analysts echo this cautious outlook, forecasting mid-teen percentage growth rates through fiscal 2026.

Adding to the worries is a slowdown in its next-generation security (NGS) annual recurring revenues (ARR). While NGS ARR remains a key growth driver, its growth rate has decelerated for four consecutive quarters. Palo Alto Networks’ guidance for fiscal 2025 indicates 31-32% NGS ARR growth, signaling continued momentum loss.

Image Source: Palo Alto Networks, Inc.

Why PANW is Still a Strong Long-Term Bet

Despite short-term concerns, Palo Alto Networks’ long-term growth story remains intact. As businesses grapple with increasingly complex cyber threats, demand for robust cybersecurity solutions is soaring. The global cybersecurity market is projected to grow from $193.73 billion in 2024 to a staggering $562.72 billion by 2032. Palo Alto Networks is well-positioned to benefit, given its reputation for innovation and comprehensive product offerings.

The company’s focus on AI, automation and cloud security has kept it ahead of the curve. Its partnership with NVIDIA to develop AI-driven private 5G security solutions demonstrates its commitment to targeting emerging opportunities in critical industries.

Palo Alto Networks’ platformization strategy has also been transformative. By bundling a suite of cybersecurity tools into an integrated platform, the company has transitioned from one-off sales to recurring revenue models. This shift has provided financial stability and predictability, making Palo Alto Networks a preferred choice for enterprises seeking long-term security solutions.

Conclusion: Hold PANW Stock for Now

While Palo Alto’s near-term growth may be slowing, its robust long-term potential remains compelling. The company’s focus on innovation, coupled with its ability to address the growing complexity of cyber threats, positions it as a leader in a rapidly expanding market.

Existing investors should hold on to the stock as Palo Alto continues to invest in growth areas like AI, cloud security and platformization. However, given its premium valuation and near-term headwinds, new investors might consider waiting for a more attractive entry point. PANW carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Fortinet, Inc. (FTNT) : Free Stock Analysis Report

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