There are a lot of reasons for insiders to sell their own company’s stock, but only one reason they’d buy it. Few people have as much insight into a business’s operations and financial wherewithall than the CEO, which means few people have a better idea of how much a business’s stock is worth. That’s why Palo Alto Networks (NASDAQ: PANW) CEO Nikesh Arora made headlines when he bought $10 million worth of the stock, according to SEC filings.
The purchase followed a 33% decline in the share price. The broader market sell-off has been exacerbated by perceived threats of generative artificial intelligence (AI) for the software sector and cybersecurity companies in particular, fueled by a slew of releases from Anthropic. But AI may present great opportunities for companies like Palo Alto, and the stock still looks like a great buy right now.
Is artificial intelligence a friend or foe?
Cybersecurity stocks fell after a leak revealed details of Anthropic’s new large language model, Mythos. A draft blog post revealed potential cybersecurity concerns that could be exacerbated by the model’s capabilities. That follows Anthropic’s release of Claude Code Security, which can scan codebases for security vulnerabilities.
The market’s reaction to Anthropic’s developments is curious. If generative AI makes it easier to develop and execute cyberattacks, demand for more robust cybersecurity software should increase. And Palo Alto Networks is in one of the best positions to offer broad coverage for enterprises.
Over the last few years, Palo Alto Networks has shifted to a platformization strategy, using software-based solutions instead of hardware to secure enterprise systems. That’s necessary as workforces increasingly operate remotely, company data is held in the cloud, and the opportunities for cyber attacks expand. Palo Alto offers three main platforms designed to cover a business’s needs across network security, cloud security, and security operations.
Palo Alto sells customers on its ability to provide comprehensive coverage of their cybersecurity needs through its broad portfolio of services. As their needs expand, Palo Alto likely has a solution within one of its platforms. It wants to be a one-stop shop for every enterprise’s security.
As of the end of its second quarter, the company counted 1,550 platform customers, up 35% year over year. What’s more, the strategy has resulted in strong net revenue retention of 119%, indicating customers are taking more services in each platform offering, with limited customer churn.
Despite the decline in stock price over the last few months, Palo Alto shares still trade at a premium valuation. At 43 times forward earnings and 11.5 times sales expectations, the stock might seem expensive. But it’s rapidly growing its high-margin software-based solutions, which increased 33% last quarter. The overall 15% top-line growth is weighed down by its legacy hardware business. As software solutions become more important for enterprise customers combating AI-powered cyber attacks, Palo Alto is well positioned to grow its market share and accelerate its top- and bottom-line growth.
That context makes its current share price look much more attractive, and it’s no wonder Arora decided the market’s reaction was overdone.
