Shares of global cybersecurity giant Palo Alto Networks (NYSE:PANW) have had a strong 2019, rising more than 20% year to date (YTD). But, despite the strong YTD performance, PANW stock remains nearly 10% off its all-time high of around $255 — which it reached in early 2019.
Fortunately, there’s reason to believe that PANW stock can make new all-time highs in 2020.
Specifically, two big tailwinds should emerge for Palo Alto Networks in 2020. First, global information technology (IT) corporate spending trends should improve in 2020 amid easing U.S.-China trade tensions.
Second, Palo Alto Networks has unveiled a suite of new, next-gen security products — the sum of which should gain significant traction in 2020.
Overall, Palo Alto Networks projects to sustain big growth in 2020. PANW stock is not priced for this, though, and the valuation is actually discounted. Consequently, as big growth converges on a discounted valuation throughout 2020, Palo Alto Networks stock will fly higher.
How much higher? To prices north of $255, which would indeed mark a new all-time high for the cybersecurity stock.
2 Big Tailwinds for PANW Stock
So let’s look at these tailwinds in more detail.
First, global IT capital spending hit a lull in 2019. As U.S.-China trade tensions escalated throughout the year and the global geopolitical and economic environments became more uncertain, multinational IT companies curtailed their capital spending plans. Palo Alto Networks makes its money from IT spend, so a lull in global IT spend adversely impacted its growth narrative. Revenue growth rates came into the year around 30%, and exited the year around 20%.
Now, U.S.-China trade tensions are easing; Phase one of the trade deal is all but done. Trade tensions should continue to ease throughout 2020, since neither side has any incentive to up the trade war ante in an election year for the U.S.
As these trade tensions ease, the global geopolitical and economic environments will stabilize. This stabilization will compel multinational IT companies to re-up their capital spending plans, which will provide a meaningful push for Palo Alto Networks and should help the company sustain 20% revenue growth throughout the year.
Second, Palo Alto Networks’ next-gen security products will gain significant traction in 2020. Specifically, Palo Alto recently unveiled a suite of multi-cloud, multi-platform integrated security solutions catered towards the next generation of enterprise security.
These new products will continue to gain traction in 2020 as global IT spending trends improve. Thus, in 2020, Palo Alto Networks projects to gain share through new product expansion in a rebounding cybersecurity market. This combination ultimately implies that Palo Alto’s growth trajectory will improve in 2020.
Palo Alto Networks Will Make New Highs
The attractive thing about PANW stock from an investment perspective is that shares are not priced for accelerating growth, and accelerating growth is exactly what will happen in 2020.
The numbers here are simple to follow. Globally, the cybersecurity market has been growing, still is growing and projects to keep growing at around a 10% year-over-year rate. In that market, Palo Alto Networks has gradually expanded share as it has emerged as the world’s leading cybersecurity firm.
This steady share expansion should persist over the next few years, as Palo Alto Networks builds out next-gen enterprise security solutions. Steady share expansion in a 10% growth cybersecurity market implies 20% revenue growth potential for Palo Alto Networks.
Gross margins should remain relatively stable in the 75% to 78% range. At the same time, while operating expenses are running way higher this year with the aggressive expansion of new products — and this aggressive expansion will eventually slow. When it does, operating expense growth will slow meaningfully, and positive operating leverage will come back into the picture. By 2025, this company has a very realistic chance to hit its long-term operating margin target of 25% or more.
Under these assumptions, Palo Alto Networks reasonably projects as 20% profit grower over the next few years, and should hit about $15 in earnings per share by 2025. Based on an exit multiple of 25-times forward earnings — which is average for systems software stocks — and a 10% annual discount rate, that equates to a 2020 price target for PANW stock of over $250.
Bottom Line on PANW Stock
The bull thesis on PANW stock heading into 2020 boils down to three things. One, global IT spending trends will improve in 2020. Two, Palo Alto Networks will expand market share in that rebounding IT market thanks to new product launches. Three, because of the first two drivers, Palo Alto Networks’ growth trajectory will remain robust in 2020 — and the stock simply isn’t priced for this.
Comprehensively, PANW stock looks well positioned to make new all-time highs over the next 12 months.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
