Why Palo Alto Networks hitting $100 billion in market value is just the beginning

Published Fri, Dec 29 202311:13 AM EST

Palo Alto Networks this month became the first cybersecurity company to eclipse $100 billion in market value. We believe it can get plenty bigger. On Dec. 14, it traded above market cap milestone for the first time when shares hit an all-time intraday high of $318 each. The stock has yet to close above that level. Hitting the $100 billion mark was a long-held goal CEO Nikesh Arora, but should be viewed as a new beginning, not an end. Shares could move higher in 2024 even if the operating environment proves more challenging. Palo Alto is the "winner and new champion of cybersecurity," Jim Cramer said recently. PANW YTD mountain Palo Alto Networks (PANW) year-to-date performance While PANW shares have cooled off a bit recently, the company's leadership in the industry, coupled with strong demand and a robust customer base, will serve it well in the new year. First, we like investing in cybersecurity, a secular theme expected to grow in the coming years, regardless of the economic backdrop. And Palo Alto has shown it can perform during uncertain times — with interest rates at 22-year highs — and will continue to do so as the Federal Reserve looks to cut rates in 2024. Cybersecurity threats to companies are only going in one direction: up. "This year has been a phenomenal year for cybersecurity stocks," Arora told Jim in a recent interview , arguing that more companies will rely on the kinds of services Palo Alto provides. "And I think it's just the beginning." Shares of Palo Alto have more than doubled in price throughout 2023, up a whopping 116%. Despite the corporate needs for cybersecurity, we are aware that spending could get cut if we tip into a recession next year. On top of that, the high cost of money and customers seeking shorter-term duration contracts are potential headwinds. This was one reason for the billings pressure last quarter , which hit the stock price. We said to look past it and to buy off the weakness, focusing instead on the low churn and strong remaining performance obligation growth (revenue that has been contracted but not yet invoiced.) Still, it is something we're monitoring. Palo Alto does minimize wild swings in its performance by offering diverse and less-cyclical revenue channels — a strategy that sets it apart from more narrowly focused peers like Fortinet and Tenable . It is also taking advantage of the trend of companies consolidating their budgets around the largest and best names like Palo Alto that offer a wide array of security solutions. As Jim previously remarked, Palo Alto is the only "real soup-to-nuts cyber play." Morgan Stanley analysts said Palo Alto's artificial intelligence capabilities give it an edge over the competition. "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," the analysts wrote in a recent research note. Although AI is not a core part of the Club's investment thesis for Palo Alto, we like management's progress in this fast-growing business. Finally, we think regulation will play a role in boosting demand for Palo Alto's products in 2024. The Securities and Exchange Commission recently issued new rules for publicly-listed U.S. companies, requiring them to file Form 8-K reports after a material cybersecurity incident. As businesses begin to comply with this new mandate, which went into effect last week, analysts argue that many will upgrade their Security Operations Centers (SOC). As a result, companies will need to invest in SOC and other cybersecurity infrastructure offered by cybersecurity firms like Palo Alto to meet these regulatory requirements. (Jim Cramer's Charitable Trust is long PANW . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Arora Nikesh, Palo Alto Networks CEO & Chairman at the WEF in Davos, Switzerland on May 23rd, 2022.

Adam Galica | CNBC

Palo Alto Networks this month became the first cybersecurity company to eclipse $100 billion in market value. We believe it can get plenty bigger.