Goldman Sachs says buy Palo Alto Networks as the cybersecurity company diversifies its business

Published Tue, Feb 14 20236:28 AM EST

Palo Alto Networks ' diversification strategies can mean big gains for the stock, according to Goldman Sachs. Analyst Gabriela Borges initiated the cybersecurity stock with a buy rating and a $205 price target, implying upside of 23.3% from Monday's closing price of $166.31. "We believe Palo Alto Networks is furthest along in the industry with executing a multi-platform strategy with technology leadership across several product vectors," Borges said in a note to clients Tuesday. Borges said Palo Alto has utilized its leadership in network security to branch out into other revenue streams within the cloud. She said the company has a "balanced" innovation strategy that includes investing in core competencies, research and development and merger-and-acquisition work. The company has completed more than $2.9 billion in acquisitions since 2013. Because firewall subscription growth will likely be under pressure in the long term, Borges said the company can lean more on those other offerings. The analyst also noted that Palo Alto should have "more consistent and durable growth" than peers. One of those big business opportunities is its next-generation security unit, which Borges said could grow at a compound annual rate of 28% over the next three years. That's driven by growth in sub-businesses called SASE, Cloud and Cortex. Though Borges said Palo Alto has a smaller footprint than competitors in these areas, it can look to its platform and integration approach to make up for it. She said the company's approach, paired with scale, will drive margin leverage and create a path to GAAP profitability. Borges said the increased commitment to both financial indicators will help Palo Alto remain a top player when it comes to the rule of 40, which means combined revenue growth rate and profit margin should hit or exceed 40%, even in a period of slowing growth. Shares of Palo Alto Networks rallied 19.2% year to date, rebounding from a 24.8% drop in 2022. Palo Alto wasn't the only cybersecurity stock Borges was getting bullish on, giving buy ratings to CrowdStrike and Fortinet as well. — CNBC's Michael Bloom contributed to this report.