Palo Alto Networks (NYSE:PANW) has gained over 48% since the start of the year, regaining the ground lost after the stock hit a mid-2015 peak around $190. The current $215 price tag is the highest Palo Alto stock has ever sported—though the same can’t be said for the stock’s current forward P/E of 55, according to Y Charts.
Sure, it’s higher than the stock’s P/E around 33 last fall, but prior to that shares were trading for over 60 times forward earnings. Put another way: a forward P/E of 55 may sound high, but it’s not necessarily a harbinger of bad news for Palo Alto stock.
The current median forecast from analysts, according to CNN Money, is $235—less than 9% upside, but maybe those estimates haven’t caught up to the already-pocketed gains.
Over the next five years, earnings are slated to expand by nearly 30% per year on the back of substantial sales growth north of 20% per year.
A Closer Look at Palo Alto Stock
Palo Alto has over 50,000 customers in over 150 countries, according to its website, and counts 85% of Fortune 100 companies as its customers. The company’s upward momentum can perhaps be attributed to a string of acquisitions and a new head honcho.
New CEO Nikesh Aroro, who reportedly invested $20 million of his own money into Palo Alto stock and who formerly worked for Google, was announced at the beginning of June.
On top of that, Palo Alto closed on its acquisitions of Evident.io and Secdo this year. The former will help with secure cloud deployments, while the latter is an endpoint protection play. Both additions should help the cybersecurity leader add to its moat.
More recently, the company announced that it wants to raise $1.5 billion, potentially for additional acquisitions. As the Register reported, the company was notably vague about what that money will go towards—hence the website’s headline: “Palo Alto Networks … wants $1.5bn for, er, stuff and things.”
In its press release, the company said it does not currently have any agreements or understandings with respect to any such material acquisitions or strategic transactions.”
Management also listed a bunch of other things the funds could be used for. But given its track record, an acquisition seems like a likely next step—and that’s a good thing.
Many segments of the tech industry are consolidating because acquisitions are a great way for established players to fill gaps and address new demand—precisely what the two aforementioned buys do for Palo Alto.
Cybersecurity is a particularly appealing segment of the tech world, too, and Palo Alto Networks is one of the biggest names there is. Through 2021, the cybersecurity market is expected to grow between 12% and 15% per year.
With Palo Alto Networks demonstrating that it’s willing to buy its way to a bigger slice of that expanding pie, there’s no major reason to doubt the company’s solid growth estimates.
When a stock is sitting at an all-time high, investors naturally divide into two basic camps: the idea that the stock must be overbought or the idea that the stock must just be getting started.
I think Palo Alto is laying the foundation for continued gains and even higher highs, especially as the market it leads continues to grow.
As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.