Palo Alto Networks (PANW) just entered Fiscal Year 2025 with notable momentum, demonstrating continued revenue and earnings growth while raising its guidance for the year. The leading cybersecurity company, known for its advanced firewalls and cloud-based security solutions, posted accelerating revenue growth and improving operating margins. Yet, the stock’s valuation appears stretched following the 49% rally recorded over the past year, which may pose potential risks for investors. Therefore, I am neutral on PANW stock.
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Q1 Revenue Growth Signals Renewed Momentum
What immediately caught my attention in PANW’s Fiscal Q1 results was the notable 14% year-over-year revenue growth, hitting a record $2.1 billion. It accelerated from the 12.1% growth posted in the previous quarter and broke a four-quarter streak of decelerating revenue growth. The primary drivers behind this quarter’s growth were the continued success in its Next-Generation Security (NGS) offerings, with NGS ARR (Annual Recurring Revenue) growing by 40% to $4.5 billion.
The acquisition of QRadar SaaS from IBM also played a part, contributing roughly $74 million to NGS ARR. Moreover,
PANW has continued to benefit from robust demand for its platformization strategy. The company reported several large deals, such as a $50 million security transformation deal involving XSIAM and XDR and another $20 million network security expansion deal with a financial services firm. To me, these transactions essentially indicate that large enterprise clients continue to favor PANW’s cybersecurity solutions, which integrate multiple functionalities into unified platforms—thus reducing complexity and bolstering security all-around.
Improving Profitability and Free Cash Flow
PANW made notable progress in improving its profitability during the quarter as well. In particular, the company expanded its adjusted operating margin to 28.8%, up 60 basis points. Besides the increase in revenues, this margin expansion was driven by internal efficiencies, including a reduction in sales cycle times and a stronger focus on the platform-based approach, as I mentioned earlier, which allowed the company to close larger deals more smoothly.
As a result of these efficiency efforts, adjusted EPS advanced to $1.56, up 19% from $1.38 a year ago. Free cash flow was also substantial at $1.47 billion on an adjusted basis, supported by high bookings from the previous quarter. In the post-earnings call, PANW’s CEO, Mr. Nikesh Arora, emphasized that operational discipline will keep boosting margins despite continued investments made to sustain future growth.
Valuation Concerns Persist despite Strong Results
As we’ve seen thus far, PANW delivered solid numbers in Fiscal Q1. Nevertheless, I believe that the stock’s valuation remains a point of concern. Following a 49% rally over the past year, shares are currently trading at lofty multiples, even with management raising their prior guidance for the year.
Specifically, the company now expects revenues to come in between $9.12 billion and $9.17 billion, implying growth of 14% year-over-year. Adjusted EPS is also projected to be in the range of $6.26 to $6.39, implying growth of about 12% compared to Fiscal 2024. And yet, these figures, in turn, imply the stock is now trading at a steep 14 times Fiscal 2025’s expected sales and 70 times the expected adjusted EPS. These multiples are notably rich, particularly given the company’s revenue and earnings growth remains in the mid-teens.
In the meantime, I would urge investors to be wary of PANW’s adjusted EPS figures in the first place, since they exclude significant costs such as stock-based compensation. I think this exclusion is material, given that SBC continues to result in shareholder dilution, thus hindering investors’ total return prospects. With $0.92 of this quarter’s $1.56 EPS essentially consisting of SBC expenses, PANW stock is actually trading at a much loftier GAAP-based multiple than its adjusted EPS implies, further stressing how expensive it is today.
Is PANW Stock a Buy?
Interestingly, Wall Street analysts seem quite bullish on Palo Alto Networks’ prospects moving forward despite the stock’s rich valuation. Specifically, PANW stock features a Strong Buy, with recent analyst ratings consisting of 19 Buys and three Hold ratings over the past three months. At $422.05, the average PANW stock price prediction implies 5.5% upside potential.
For the best guidance on buying and selling PANW stock, look to Brian Essex. He is the most profitable analyst covering the stock (on a one-year timeframe), boasting an average return of 49.6% per rating and an impressive 95% success rate.
Final Thoughts
Overall, Palo Alto Networks is showing solid momentum to start its new fiscal year, including a modest acceleration in revenue growth, improved margins, and strong demand for its Next-Generation Security products. The company’s ability to secure large deals while improving efficiencies is certainly a big plus.
That said, the stock feels expensive after its prolonged rally, and its high valuation multiples make me cautious. At the same time, PANW’s notable stock-based compensation introduces an additional risk for shareholders, as it artificially inflates its earnings, stressing the need for heightened caution.
