Is Palo Alto Networks Stock a Buy Now?

Palo Alto Networks (NASDAQ: PANW) has experienced a topsy-turvy ride on the stock market so far this year, rising impressively in the first couple of months, then taking a steep tumble as tariff-fueled turmoil dented investors' confidence in technology stocks.

However, Palo Alto has recovered impressively over the past month, with a 16% jump in its stock price as of this writing. The good part is that the company's latest quarterly results exceeded expectations.

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Does this mean investors can still buy Palo Alto stock in anticipation of more upside following the latest quarterly results it released Tuesday?

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Palo Alto Networks' valuation is on the expensive side

Anyone looking to buy Palo Alto stock right now should keep in mind that the stock is trading at rich multiples. Its trailing price-to-earnings ratio of 60 is well above the tech-laden Nasdaq-100 index's average earnings multiple of 31. While the company's forward earnings multiple of 52 is a bit lower, it is still on the expensive side.

This probably explains why Palo Alto stock dipped in pre-market trading Wednesday. Though its revenue and earnings were better than analysts had been looking for, its guidance didn't impress investors. For its fiscal 2025 third quarter, which ended on April 30, the company reported a 15% year-over-year increase in revenue while its non-GAAP net income jumped by 21%.

Investors were probably hoping for an acceleration in Palo Alto's growth to justify the stock's premium valuation. However, management's guidance was for a year-over-year revenue increase of 14% to 15% in the current quarter and a 17% jump in the bottom line -- neither of which would be an acceleration in its growth rate.

Of course, Palo Alto's guidance does point to healthy growth -- just not rapid enough growth relative to the company's current valuation. Yet, there are signs that Palo Alto's growth could accelerate in future quarters, as the company is witnessing healthy levels of growth in certain segments that are bolstering its revenue pipeline.

High-growth markets could lead to stronger growth in the long run

In its fiscal Q3, Palo Alto's remaining performance obligations (RPO) increased by 19% year over year to $13.5 billion, outpacing the growth in the company's top line. RPO is a measure of the total value of a company's contracts that are yet to be fulfilled. So, the faster growth in this metric as compared to Palo Alto's top line suggests that it is landing contracts for new work at a faster pace than it's fulfilling older contracts right now.

This can be attributed to the growing demand for the company's next-generation security (NGS) services such as firewalls, cloud and network-based security, and for its artificial intelligence (AI)-focused solutions. The company pointed out that in the quarter, the annual recurring revenue of its NGS business increased by an impressive 34% year over year to $5.1 billion.

Palo Alto estimates that it could triple its NGS annual recurring revenue by fiscal 2030, which could give its overall revenue a nice boost considering that it has generated just under $9 billion in revenue over the past four reported quarters.

Additionally, the company's earnings growth could accelerate in the long run thanks to its platformization strategy. Palo Alto is following a strategy of consolidating multiple cybersecurity solutions into a single platform. This allows organizations to secure their networks more effectively through a single window, while also reducing costs.

The company has witnessed a nice jump in the number of customers opting for platformization. The total number of platformizations at the end of the previous quarter increased by nearly 40% year over year to 1,250 out of its top 5,000 customers. What's more, those customers opting for platformization are spending more money on Palo Alto's offerings. This is evident from the 63% growth in the number of customers providing more than $10 million in annual recurring revenue connected to its NGS solutions.

So, as Palo Alto convinces more customers to adopt its platformization strategy, there is a chance that it will be able to generate more revenue from those established customers. This is probably why analysts' consensus estimates project an acceleration in the company's bottom-line growth.

PANW EPS Estimates for Current Fiscal Year data by YCharts.

Savvy investors, therefore, would do well to keep an eye on Palo Alto. If this cybersecurity stock heads still lower in the wake of its latest quarterly report and reaches a meaningfully cheaper valuation, it may make sense for investors to start accumulating shares, as its improving revenue pipeline and platformization strategy could eventually translate into stronger growth.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.