Morgan Stanley says this cybersecurity stock has further to go after becoming first in industry with $100 billion market value

Published Mon, Dec 4 202311:47 AM ESTUpdated Mon, Dec 4 20232:51 PM EST

Morgan Stanley thinks Palo Alto Networks will be the leader in artificial intelligence-driven security platforms, eventually propelling it far past its peers. Palo Alto Networks on Friday approached $300 a share, becoming the first cybersecurity company to surpass $100 billion in market capitalization, the investment bank said. Morgan Stanley rates Palo Also overweight and has a $304 price target on the stock, but the most bullish case says the stock is worth $350. "We see further upside from here as growing AI tailwinds and multiple product cycles drive re-acceleration in FY25," analyst Hamza Fodderwala wrote in a note Monday. "With large unique data sets and market leadership across multiple major security categories, we think PANW is best positioned among the pure-play security vendors to deliver AI-driven security automation, which underpins the path beyond $100 billion." Palo Alto Networks' growth is a significant milestone for the security industry, according to Fodderwala. Not only does it highlight a large market opportunity — with the company's market share comprising less than 5% of a more than $180 billion industry, which is still growing at more than 12% annually — it also emphasizes the ability of platforms to capture market share in multiple security categories, he said. Palo Alto Networks' advanced security platform Cortex XSIAM and its newer AI-enabled products, such as network security co-pilot and data security, continue to differentiate the company from its security software peers, according to Fodderwala. The analyst expects the company to achieve higher operating margins and substantial free cash flow growth over the next four years. Still, while Palo Alto's outlook is bright for the fiscal year ending in July 2025, "the near-term setup through the 1H CY24 seems tough, as the higher interest rates, macro uncertainty and a cyclical downtick in hardware demand puts pressure on billings and overall topline growth," Fodderwala said. Longer-term avenues for growth include new product cycles, especially the ability of Cortex to modernize security operations, as well as a potential firewall refresh in the second half of fiscal 2025, given both the increase in network traffic from remote and hybrid work and that replacement cycles for hardware range between three and four years. "We continue to see attractive risk/reward in PANW shares," Fodderwala said. The company's shares declined more than 4% on Monday, but have more than doubled in 2023, climbing almost 104%. — With added reporting by CNBC's Michael Bloom. Correction: Cortex XSIAM is a security platform from Palo Alto Networks. An earlier version misstated the name of the platform.