In terms of sheer relevance, it’s difficult to ignore Palo Alto Networks (NASDAQ:PANW), particularly in light of recent cybersecurity concerns. It’s not just about the rising threat posed by nefarious actors online. Rather, the damage they deal translates to severe financial losses and operational disruption. Therefore, even if Palo Alto isn’t attractive from a valuation standpoint, it distinguishes itself via relevance. Thus, I am bullish on PANW stock.
PANW Stock Should Build on Its Impressive Rally
At first glance, the hesitation toward Palo Alto is understandable. Gaining over 78% since the beginning of the year, many investors may fear holding the bag. Yes, PANW stock obviously outpaced the underlying Nasdaq Composite, which moved up over 29% during the same period. Nevertheless, the core relevance of the cybersecurity business offers a compelling catalyst.
Naturally, the spotlight shined glaringly on household goods manufacturer Clorox (NYSE:CLX) over the past few weeks. Last month, the company revealed that it had to take some of its systems offline to address unauthorized activity. Unfortunately, this directive led to decreased rates in order processing, subsequently imposing issues with product availability.
Last week, Clorox further revealed that it’s struggling to resolve the problems caused by the cyberattack. On October 4, TipRanks reporter Sheryl Sheth noted that management “warned investors that the temporary stoppage of operations would have a significant financial impact on its first quarter of Fiscal 2024.”
Unsurprisingly, CLX plunged badly on the disclosure. Last week, shares fell by almost 5%. In the trailing month, they’re down more than 20%.
As ugly as the breach was, the damage only serves to send a warning to other enterprises not to take their cybersecurity measures lightly. Obviously, investors don’t need to look far to recognize the spending cuts companies are engaging in. Some might be tempted to scale back on their information technology (IT) processes and protections.
However, the Clorox breach confirms that such notions may be bad news. Sure, reductions in IT spending could help temporarily aid the bottom line. Nevertheless, all it takes is one major breach, and the savings evaporate. On that note, PANW stock comes out a winner.
Palo Alto Gets an ‘Assist’ from Other Cybersecurity Disasters
Generally speaking, it’s better to invest in companies that have forward-looking, accretive businesses, and that is largely what you get with Palo Alto. However, the cynical backdrop for PANW stock – while not particularly pleasant – is incredibly powerful. In particular, other high-profile companies have also suffered from cyberattacks, again underscoring the importance of cybersecurity.
As Sheth stated, “It is noteworthy that casino giants MGM Resorts (NYSE:MGM) and Caesars Entertainment (NASDAQ:CZR) were the first to undergo a similar attack. They even paid a hefty ransom to rescue their systems from the hackers.” That last part is about as clear of a fundamental catalyst as you can get for PANW stock.
Cyberattacks no longer represent mere nuisances. Instead, they’re increasingly punitive in terms of their financial toll. Worse yet, many companies on the wrong end of a digital breach often have little choice but to pay up. With supply chains and operations suddenly disrupted, it may make better business sense to fork over the ransom rather than hold an indefinite line of righteous anger.
If that wasn’t bad enough, the breaches that Sheth reported on – arguably all household names – have led to an ugly precedent: companies will pay the ransom if the damage is bad enough. That only serves to motivate cybercriminals and, in turn, makes PANW stock that much more relevant.
Addressing the Elephant in the Room
Logically, one common factor that investors consider when assessing an investment is its underlying valuation. For PANW stock, that’s a bit of a problem. Right now, shares trade for about 195x trailing-year earnings. In contrast, the software (infrastructure) sector runs a trailing earnings multiple of 31.14x. On paper, that seems incredibly overvalued.
However, such multiples only tell part of the tale. In August (and before the extent of the Clorox mess was disclosed), Palo Alto saw its shares surge based on its impressive earnings per share guidance. With high-profile companies suffering terribly from digital breaches, it’s reasonable to conclude that more enterprises are thinking very carefully about their IT integrity. Ultimately, that may be good news for PANW stock.
Is PANW Stock a Buy, According to Analysts?
Turning to Wall Street, PANW stock has a Strong Buy consensus rating based on 32 Buys, three Holds, and zero Sell ratings. The average PANW stock price target is $279.48, implying 10.6% upside potential.
The Takeaway: PANW Stock is Only Getting More Relevant
It’s always tough to read about cyberattacks because behind these headlines sit countless workers whose livelihoods depend on trouble-free operations. At the same time, such narratives only underscore the critical nature of robust cybersecurity measures. Over the long run, that should be a net positive for PANW stock.
