Oliver | MMMT Wealth
Founder of MMMT Wealth, CPA, Technical/Fundamental Analysis
Cybersecurity is a clear secondary beneficiary of AI that has been lumped into the software selloff, and Palo Alto Networks is one of the safe bets. It trades at 9x NTM sales for about 23% growth, with a Rule of 40 score above 60 and its CEO buying shares, which is hard to ignore. CrowdStrike and Zscaler are the other safe bets. x.comÂ
The selloff in Palo Alto Networks on fears of Claude Code Security is bizarre, and CEO Nikesh Arora just bought $10M of stock at $147. Claude Code Security helps developers find vulnerabilities while writing code, and its fixes still need human verification. Arora said LLMs aren't accurate enough to displace segments such as security operations and can't leverage Palo Alto's proprietary data. x.comÂ
Palo Alto Networks was unjustly sold off on overblown AI concerns, when AI adoption should actually be a tailwind. Its Next-Gen Security ARR has tripled over three years. x.comÂ
Palo Alto Networks has strong secular tailwinds as AI adoption drives platform market-share gains, so the winner should be left to run. Morgan Stanley named it a sector top pick, raised its target to $410 from $394 with an Overweight rating, and cited underestimated enterprise spending consolidation. The stock trades near 52-week highs. x.comÂ
Palo Alto Networks at 21x forward sales is too expensive for 17% pro-forma growth, despite BTIG's view that it is worth more than the current price. x.comÂ
Zscaler likely needs to broaden its product scope, or Palo Alto Networks and CrowdStrike will dominate security through organic growth and acquisitions. Palo Alto grows about 14% organically and mid-20s including acquisitions and, with 4x Zscaler's revenue, commands 10x EV/sales; CrowdStrike, at 2x Zscaler's revenue, gets the same multiple. Scale is being rewarded. x.comÂ
Palo Alto Networks looks set for a near-term move to $400-$410 after its CEO bought $10M of shares. The setup resembles Dell's, and cybersecurity looks attractive here. x.comÂ
Palo Alto Networks is too expensive at 21x sales and 79x forward earnings for a company expected to grow only about 20% over the next few years. Cybersecurity matters more as AI advances, but even a good company has to be bought at the right price, which is why the stock fell even after a big earnings beat. x.comÂ
Palo Alto Networks wants every AI agent's credentials routed through it, and whoever brokers the keys sits inline on every action a CISO wants to control. It is the only firewall vendor that also owns a top privileged-access stack. Last quarter revenue grew 34% at a 70% gross margin, with $4.11 billion of free cash flow and net cash. The price is steep at 81.2x forward earnings and 28.2x sales, leaving no cushion if cloud platforms credential agents natively. x.comÂ
Palo Alto Networks benefits from AI increasing software exploits, a basic insight that made it an easy cybersecurity pick. Its CEO also comes across well on podcasts. x.comÂ
Palo Alto Networks is a hodge-podge of acquired cloud products stacked on a legacy firewall business, yet trades above 20x forward revenue. Two years from now it will likely be cheaper than today. By comparison, Salesforce has four times the revenue base at two-thirds of Palo Alto's market cap and trades below 20x GAAP earnings. x.com x.comÂ
Palo Alto Networks stands to gain because Mythos has changed how companies budget for security, from a nice-to-have to a probable buy-it-now rush to sign with category leaders. The CEO has been pitching its Next Gen Security product hard, with margin expansion hoped for. That demand may show up in its guidance at today's earnings. The market is rewarding category leaders doing even better, such as ServiceNow and Cloudflare. Options imply a 10.5% move, about 21% for the 2x PALU fund. x.comÂ
