We are maintaining our “Buy” rating on Focus List selection Palo Alto Networks Inc. (PANW) with a target price of $240. While PANW shares were hit hard in the 2022 market and tech sector selloffs, they continue to perform much better than the cybersecurity industry, writes Joseph Bonner, analyst at Argus Research.

Palo Alto has shown resilience in the face of macroeconomic uncertainty as most enterprises recognize the critical nature of IT security after years of high-profile cyberattacks and are loath to cut back too much on security spending (even if forced to reduce other IT spending in a slowing economy).

What makes Palo Alto stand out from its sector peers is not just best-in-class technology integrated into a comprehensive cybersecurity platform, but also its rapid product innovation cycle, focused on next-generation cloud security, secure access at the service edge, and automated security operations.

Management has adopted a strategy of balancing rapid growth with profitability, and in the current macroeconomic environment, the market appears to favor this approach over “growth at all costs,” particularly for technology companies. This strategy is exemplified by management’s consistent focus on margin improvement.

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With its 3Q23 results, Palo Alto raised its FY23 EPS guidance for the third time, implying continued marked improvement in profitability — just what the market is looking for. We view this strong operating expense leverage as a hallmark of good management.

Enterprises trying to protect cyber assets have often settled on a “buy-best-of-breed” approach, which has led to complex and perhaps dissonant cybersecurity solutions requiring extensive monitoring. While Palo Alto’s solutions are often highly competitive if not best-of-breed, the company is focused on providing an integrated, end-to-end security platform from the basic firewall out to cloud security and to all endpoints.

Palo Alto sees opportunities in helping customers protect endpoints in the new distributed work-from-home environment. Management will continue to invest in its rapidly growing next-generation security solutions and in its sales force to drive adoption.

The company has enhanced its strategic position though a robust R&D cycle and a series of tuck-in acquisitions and has created an enterprise cybersecurity platform that addresses cloud-protected and distributed security, automation, artificial intelligence, and IoT.

As more IT workloads shift to the cloud over time, cloud security is likely to remain a critical growth vector. We view Palo Alto as a leader in a very competitive and fragmented enterprise network security industry and believe that management has recognized and taken advantage of emerging industry trends to address evolving customer needs.

Recommended Action: Buy PANW.

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