3 Reasons to Bet on Palo Alto Networks

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Palo Alto Networks' (NYSE: PANW) latest fourth-quarter results clearly indicate that its sales strategy reorganization and product updates are working well, helping it add a record 3,000 customers during the period.

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Not surprisingly, Palo Alto beat the higher end of its own revenue and earnings guidance by a wide margin. Additionally, the company's full-year forecast for fiscal 2018 was better than Wall Street's expectations. But there's more to Palo Alto than just the quarterly numbers and the guidance. A closer look at some key trends clearly indicates that Palo Alto is pulling the right strings to make a dent in the cybersecurity market.

Subscription growth continues

Palo Alto's subscription revenue jumped over 54% during fiscal year 2017, while revenue from providing support services increased 43%. Subscription and support services now account for almost 60% of the company's total revenue as compared to 51% during the preceding fiscal year.

The good news for Palo Alto investors is that the growth in subscription revenue is being driven by repeat purchases from older customers. More specifically, the lifetime value of the company's top 25 customers increased 56% year over year during the fourth quarter to $21.9 million.

It is evident that Palo Alto's strategy of updating its services in line with the emerging trends in the cybersecurity industry has worked wonders. For instance, the company added ransomware protection modules to its cybersecurity platform last quarter in light of the increased frequency of such attacks.

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This helped spurred Palo Alto's customer growth as organizations started buying ransomware protection after the infamous WannaCry attack crippled computers in more than 150 countries in May 2017. More importantly, this space should be a long-term tailwind for Palo Alto as ransomware protection revenue is expected to double in the next five years.

Margins growth is powering earnings

Palo Alto's subscription revenue growth has positively impacted the company's margin profile on the back of reduced customer acquisition costs. Once a customer buys a Palo Alto subscription, the company can upsell that customer subsequent product updates or new services without having to spend additional money on marketing.

Palo Alto's sales and marketing expenses dropped to 48% of revenue in the recently reported quarter as compared to 51% in the year-ago period. For fiscal 2017, the company spent 52% of its revenue on sales and marketing, down from 54% in the preceding year. As a result, the cybersecurity specialist's operating margin increased 40 basis points during the fiscal year to 20.1%.

The bump in the operating margin helped Palo Alto increase its fiscal 2017 non-GAAP (adjusted) earnings to $2.71 per share as compared to $1.89 per share in the previous fiscal year. More importantly, Palo Alto anticipates stronger bottom-line growth this year, forecasting an adjusted earnings range of $3.24 to $3.34 per share.

It won't be surprising if Palo Alto manages to hit this target, driven by recently launched products that could boost its subscription business once again in the new fiscal year.

Focus on fast-growing cybersecurity segments will be a tailwind

The global cloud security market could be worth $12.7 billion by 2022, according to one estimate. Not surprisingly, Palo Alto Networks has been adding new features and developing new frameworks to its cybersecurity platform to tap the cloud security market.

For instance, the company recently introduced a software-as-a-service (SaaS) model-based security platform that allows developers and customers to build and quickly deploy cloud-based services. Palo Alto has roped in 30 security providers to develop applications for this platform, giving customers a wide range of options.

Additionally, the cybersecurity specialist has extended the coverage of its next-generation security platform to mobile users and remote networks using the cloud. Palo Alto is confident that its product introductions will push its revenue to more than $2 billion this fiscal year.

Investors should feel encouraged by this forecast as the company is displaying remarkable resilience in the face of competition from a big fish such as Cisco. The networking giant's cybersecurity business could hit $2 billion this fiscal year, so Palo Alto needs to be agile and nimble to hold its ground.

The good news is that Palo Alto is aware of the competition, and its focus on constantly evolving its cybersecurity platform to focus on the fast-growing niches in the industry is working.

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