Cyber threats continue to pose a significant concern for top businesses worldwide. The advancement of technologies like generative artificial intelligence (AI) enables malicious actors to create highly realistic phishing emails and voice recordings, deceiving employees into disclosing sensitive information.
Recently, PwC surveyed 4,702 CEOs, with 64% expressing concerns that generative AI would heighten cybersecurity risks within their organizations over the next year. This ranked as their primary worry regarding AI, surpassing concerns about the spread of misinformation and potential legal issues.
To combat these evolving threats, businesses require advanced cybersecurity tools that leverage AI for enhanced, automated protection. Palo Alto Networks (NASDAQ: PANW) stands out as a leader in this field, despite experiencing recent challenges.
Following the release of its second-quarter results for fiscal 2024, Palo Alto’s stock plummeted by 29% due to a change in its business strategy. Nevertheless, these strategic shifts could yield positive results in the long term, making it an appealing option for investors.
Palo Alto’s Leadership in AI-Based Cybersecurity
Palo Alto’s business is centered around three platforms: network security, cloud security, and security operations. Through the integration of AI into its products, Palo Alto aims to provide businesses with cutting-edge protection.
An alarming statistic indicates that 93% of security operations centers still depend on manual processes, leading to 23% of incidents going uninvestigated and leaving vulnerabilities unchecked. Palo Alto’s Cortex XSIAM security operations platform was developed to address this issue, with AI and automation significantly reducing the need for manual intervention in security incidents.
Despite being launched just over a year ago, XSIAM has generated a substantial revenue pipeline of $1 billion. With the increasing adoption of AI in organizations, Palo Alto anticipates a $5 billion opportunity by 2030 to secure critical data and minimize vulnerabilities.
Additionally, Palo Alto notes a significant rise in phishing emails, with AI facilitating a 12-fold increase in these attacks. Given that 90% of successful cyberattacks originate from endpoints, Palo Alto’s existing protection for approximately 100 million users positions it well to address this growing threat.
Strong Q2 Performance with Adjusted Full-Year Forecast
In the second quarter of fiscal 2024, Palo Alto achieved $2 billion in revenue, marking a 19% year-over-year growth. The company also reported a 39% increase in non-GAAP earnings per share at $1.46. Despite a substantial one-off tax benefit contributing to profitability under generally accepted accounting principles (GAAP), Palo Alto’s financials demonstrate revenue growth without significant bottom-line losses, setting it apart from competitors.
Palo Alto’s remaining performance obligations increased by 22% to $10.8 billion, typically translating into future revenue. However, the company’s management revised its full-year forecast, reducing expectations for both remaining performance obligations and revenue as it undergoes a strategic shift to foster accelerated growth.
Transitioning to a Platformized Approach
The cybersecurity industry’s fragmented nature often leads companies to cobble together solutions from different providers based on their requirements. Historically, Palo Alto relied on product quality to drive customer adoption of its offerings.
Palo Alto’s three platforms offer substantial value to customers utilizing all three, with their lifetime value exceeding that of customers using a single platform by 40 times. To incentivize major customers to adopt all their platforms, the company is offering fee-free periods, aiming to convert them into paying customers upon contract expiration.
This strategic approach, though impacting short-term revenue (as reflected in decreased billings and revenue guidance), positions Palo Alto for substantial long-term growth while outmaneuvering competitors.
Investment Case for Palo Alto Stock
Palo Alto envisions that accelerating the shift toward platformization could drive the company to $15 billion in annual revenue by 2030, with 90% of it being recurring revenue, establishing a stable business foundation.
Despite targeting $8 billion in revenue for fiscal 2024, Palo Alto anticipates an 87.5% increase towards its $15 billion revenue goal or a compound annual growth rate of 11%. Moreover, the company believes AI presents potential upside to its revenue target, given the transformative impact AI-based attacks could have on the threat landscape.
While investors reacted to the reduced guidance by selling off Palo Alto’s stock, the ensuing 29% decline presents a compelling opportunity for long-term investors. If Palo Alto’s vision materializes, investors who hold onto the stock might look back favorably on their decision in the years to come.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike and Palo Alto Networks. The Motley Fool has a disclosure policy.
1 Amazing Artificial Intelligence (AI) Stock Down 29% You’ll Regret Not Buying on the Dip was originally published by The Motley Fool
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