Margin Expansion Could Be Palo Alto Networks’ (PANW) Secret Weapon

A loosening monetary policy environment and Donald Trump’s victory have caused a lot of technology stocks to reach new highs. Palo Alto Networks has done the same, except the reason is much more solid: margin expansion!

Palo Alto Networks is one of the leading companies when it comes to technology. It offers various cybersecurity solutions and services for detecting, preventing, and responding to advanced threats. What makes it unique is its Precision AI technology, which further increases security automation. It uses rich data and security-specific models to deliver the best available outcomes.

The company provides a comprehensive family of cybersecurity products, including Next-Generation Firewalls for advanced threat prevention, Prisma Cloud for complete cloud security, and Cortex XSIAM which uses advanced AI-based security operations that unify endpoint, network, and cloud data for efficient threat response.

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Recurring revenue from subscription and support fees represents 77% of total revenue while sales of products account for about 23% of total revenue. This recurring revenue forms the backbone of the company’s solid financials.

From a geographic standpoint, the Americas contribute approximately 53.74% of total revenue. Europe, the Middle East, and Africa account for around 13.7%, and Asia Pacific represents about 8.4% of total revenue.

Palo Alto Networks serves over 3,900 customers including Southwest Airlines, Banner Health, University of Michigan, Putnam Investments, Grupo Bimbo, GAF Materials, ADT Inc., and Schlumberger.

Anyone looking at the company’s finances and future guidance will be discouraged by the slowing growth rate. The company does not expect growth rates to improve in the next 12 months either, with revenue expected to come in around the $9.1 to $9.15 billion range. The growth rates have never been lower in the last 10 years!

But another way to look at it is to expect the growth rate to bottom out from here on. This is also supported by a backlog and deferred revenue that the management can utilize to keep its revenues stable in a tough market.

While the above stability can protect the downside in the stock, it is the margin expansion that drives our bullish thesis. The company continues to do a great job in making its existing customers opt for more of its products. This lowers its cost of sales for the incremental revenue it makes from existing customers.

Some analysts may even look negatively at the slow growth of the subscriber base. But this becomes irrelevant with the margin expansion the company is currently experiencing. An 8.52% operating margin is already the best the company has done in the past decade. An adjusted operating margin expectation of 27.5% – 28% confirms the management’s commitment to continued margin expansion.

If you’re a PANW shareholder, you’d be better off forgetting the revenue and customer count numbers and focusing just on the margins. That’s where the company will improve its bottom line in the next 12 months, driving the stock price higher.

Palo Alto Networks is not on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 66 hedge fund portfolios held PANW at the end of the second quarter which was 78 in the previous quarter. While we acknowledge the potential of PANW as a leading AI investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as PANW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.