Daily Stock Pick: December 28th, 2022

Inflation remains hot, and the Federal Reserve is expected to continue on its tightening path into the new year. A crucial skill to develop while navigating this complex environment is distinguishing between companies that will be around for the long run and those that are vulnerable to a weakening economy.   

Today we’re investigating a competitive area of the market that will likely continue to thrive as demand gains steam, despite a slowing economy. In this quickly evolving industry, many companies will likely get filtered out over time. Today’s featured company is taking bold steps to ensure its place at the head of the pack.     

One of the biggest threats to corporate America is ransomware. The growing possibility of losing access to essential or confidential digital property is a nightmarish scenario for executives, as the financial consequences can be enormous. As the world advances to become more digitized, so too do its threats.

According to Morningstar senior equity analyst Mark Cash, these attacks are among several tailwinds for investors in cybersecurity stocks. The “heightened threat environment, networking changes due to the pandemic changing how security works, legislation ramping up fines for miscues, spending becoming proactive and commanding a larger portion of IT budget, and these headline-grabbing breaches all help the demand,” he says.

Palo Alto Network Inc. (PANW) has been helping customers stay ahead of quickly evolving cybersecurity threats for over a decade. For ten years straight, the company has been named a market leader in network firewalls by leading research and advisory company Gartner. In fact, it achieved the highest position for ability to execute and the furthest position for completeness of vision in Gartner’s Magic Quadrant for Network Firewalls for 2022. Still, they haven’t let the recognition go to their head. Over the past few years, Palo Alto has aggressively expanded its portfolio with significant investments and acquisitions.    

The groundbreaking acquisition of Bridgecrew, a developer-first cloud security company, enabled Palo Alto’s Prisma Cloud to become the first cloud security platform to deliver security across the entire lifecycle of an application, from the building stage to deployment to run. This is the most recent in a string of additions to its portfolio of NGS (next-generation security) services.

In fiscal 2021, Palo Alto’s NGS services generated $1.18 billion in annual recurring revenue (ARR), representing roughly 28% of its top line and surpassing its prior ARR guidance of $1.15 billion. That segment’s accelerating growth complemented the stable development of its on-site appliances and services, and its total revenue increased by 25% for the full year. 

Palo Alto serves more than 85,000 customers today, compared to about 9,000 customers nine years ago. The company expects its revenue to rise 24%-25% in fiscal 2022, and its stock trades at about thirteen times that forecast. 

The consensus among 37 analysts offering recommendations for the stock is to Buy PANW. There are currently 32 Buy ratings, 2 Hold ratings, and no Sell ratings. A median price target of $217 represents a 54% upside from the current price.