Cybersecurity is more necessary than ever as artificial intelligence security threats increase, but some investors have panicked lately, thinking that AI companies will take over the tasks that cybersecurity businesses currently handle. Palo Alto Networks (PANW +3.40%), a leading security company, hasn’t been spared, and its stock is down about 22% over the past six months.
But I think some investors are getting the AI narrative about cybersecurity wrong. With threats on the rise, there may be a greater need for specialized cybersecurity companies that use AI to fight them, not less. As such, here’s why picking up some of Palo Alto’s shares right now could be a good idea.
Image source: Getty Images.
Why AI anxiety is likely overblown for cybersecurity stocks
All tech companies face disruption from artificial intelligence, and investors should not assume any company is safe. But it’s also a bad idea to immediately assume cybersecurity companies will be obsolete because of AI.
Consider that OpenAI recently announced it’s refocusing on its core AI product, which will be geared more toward workers and enterprise customers, rather than spreading its ChatGPT service across too many initiatives. The general idea is that even AI companies realize they need to focus on what they do well rather than trying to do everything.
And it’s why many software companies, including cybersecurity companies, will likely benefit from specialization in the AI age rather than being overtaken. Palo Alto Networks CEO Nikesh Arora recently said,
“Despite the current sentiment about AI and software, we firmly believe that security is [an] enabling layer that allows innovation to move forward safely and at scale.”
And the company is already seeing benefits from AI. Palo Alto’s AI security service, Prisma AIRS, launched a few quarters ago, and management said it’s already “rapidly scaling,” with more than 100 customers using it at the end of the second quarter — more than tripling in just one quarter.
Today’s Change
(3.40%) $5.21
Current Price
$158.43
Key Data Points
Market Cap
$125B
Day’s Range
$152.20 – $159.39
52wk Range
$139.57 – $223.61
Volume
1.6M
Avg Vol
10M
Gross Margin
73.50%
Palo Alto’s financial outlook looks strong
In addition to the company’s expanding AI products, its sales and revenue growth are already very healthy. Revenue increased by 15% to $2.6 billion in the most recent quarter, and diluted earnings per share jumped 61% to $0.61 per share.
Palo Alto’s management says revenue will rise 23% this year to $11.3 billion, and the company’s high profitability is still intact, with management expecting non-GAAP (adjusted) operating margin to be about 29% for this year — all at the top end of guidance.
What’s more, companies that use Palo Alto Networks are unlikely to make security changes in such an uncertain time. With the company boasting customers in all of the Fortune 100 companies and 75% of Global 2000 companies, switching costs to transition to a new security platform are high-risk for many companies.
All of the above leave Palo Alto well positioned to benefit as demand for AI security increases. And with its shares taking a big dive recently, now could be a great time to buy the company’s stock.
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