Cybersecurity Giant Palo Alto Networks Caught Between Opportunity and Maturity

As the world’s largest standalone cybersecurity company, Palo Alto Networks has potentially much to gain from a splintering world. Not to mention, its stock offers a relatively unfiltered view of investor confidence in the sector.

But while the company has risen nearly 9% so far this year, and some analysts are gung ho, a look under the hood suggests that astronomical growth can’t carry on forever, even if geopolitics feels like a dice roll in a game of Risk at the moment.

The Maturity Equation

Back in January, almost 60% of organizations including private companies told the World Economic Forum that geopolitical tensions have impacted their cybersecurity strategies. Many are also on edge about risks: One in three CEOs said they were worried about losing sensitive information or intellectual property to cyber-espionage, and 45% of cyber leaders expressed concern about operational and business disruptions. The rise of state-sanctioned cyberattacks, with China and Russia the best-known sponsors, and recent warnings to US companies to prep for potential cyberattacks from Iran have inflamed tensions.

All that suggests a market for Palo Alto Networks to grow into, what with its next-generation firewalls, cloud security services and AI-powered security operations. Goldman Sachs analysts are among those who see this logic: They maintained a buy rating on the company earlier this month, citing its revenue growth of roughly 14% in the past 12 months and its success in selling new products to existing customers. But, on the other hand, there’s a maturity challenge:

• Palo Alto Networks sales growth has slowed — its revenue growth was in the mid-20s percentage points in 2023, and its latest quarter saw revenues grow 15.7% year over year. Meanwhile, the growth of annual recurring revenue — which offers a glimpse into the company’s ability to retain customers — has declined in five straight quarters, and it’s expected to be around 32% this year, compared with 45% or more in previous years.
• Even as Palo Alto beat revenue and earnings expectations in its latest quarter, the slowdown suggests the company may be maturing and reaching a plateau where customer adoption is slowing —a reality that cybersecurity firms will have to learn to live with, as other industries have. Nevertheless, the sector is expected to grow by hundreds of billions of dollars in the next decade, meaning there will be plenty of dollars to compete for, but likely more competitors. Palo Alto, at the very least, proved more resilient during a week of concerns about conflict with Iran than the broader tech industry. Its shares rose 0.8% last week, while the iShares Expanded Tech-Software Sector ETF fell 1.8% over the same period.

Hitting the Firewall: Nikesh Arora, the CEO of Palo Alto Networks, makes a living putting up firewalls, but he also knows the feeling of rejection. He told the Humans of Bombay podcast earlier this month that after graduating from university, he was rejected from more than 400 jobs. “I saved all the rejection letters,” he said. “They’re my motivation.”