Beginning of the year Palo Alto Networks (PANW -1.03%) reported that the frequency of email-based phishing attacks has increased tenfold compared to the same period in 2023. The increase is due to malicious actors using generative artificial intelligence (AI) to quickly create realistic content and trick employees into revealing sensitive information.

This shift in strategy means that companies need to change their mindset about cybersecurity. Palo Alto is integrating AI into many of its products to make them faster and more automated, which can help combat AI-based threats. But some companies are also putting their valuable data at risk by experimenting with AI in unsafe ways themselves, so Palo Alto is releasing new tools to protect that too.

For this reason, investors with some cash that they don’t need for immediate expenses should consider investing $370 in Palo Alto shares and holding them for the next decade.

A leader in AI-based cybersecurity

Palo Alto’s cybersecurity software portfolio spans three different platforms: cloud security, network security, and security operations. And the company is integrating AI into as many products within each category as possible.

The Cortex XSIAM security solution is a great example. According to Palo Alto, 90% of enterprise security operations centers still rely on manual processes, and human managers simply cannot keep up with the sheer volume of alerts, leaving 23% of incidents uninvestigated. XSIAM uses AI to automate incident response and remediation, and according to Palo Alto, more than 50% of customers have improved their mean time to resolution (MTTR) of multiple Days previously.

In fiscal year 2024 (which ended July 31), the number of customers using XSIAM increased fourfold compared to fiscal year 2023 and bookings doubled to $500 million. These are solid results considering the tool is only about two years old, and it underscores the increasing demand for AI-powered security.

But as mentioned above, Palo Alto also focuses on protecting customers who with AI. The company is introducing new tools for its network security platform, such as AI Access Security, which assigns a risk score to hundreds of third-party generative AI applications. AI Access shows managers how employees are using these apps to ensure secure deployment. The tool also offers data controls and the ability to block certain apps entirely.

Deployment couldn’t be easier. All 5,000 existing Prisma Access customers will soon be able to use AI Access, and it’s as simple as flipping a switch. During the pilot program, around 1,000 customers expressed interest, meaning Palo Alto will soon be generating even more revenue from its existing users.

Image source: Getty Images.

The shift to platformization

Palo Alto generated total revenue of $8 billion in fiscal 2024, up 16% from the same period last year. This represented a slowdown from fiscal 2023, but a strong trend is emerging beneath the surface.

Annual recurring revenue (ARR) attributable to Palo Alto’s next-generation security (NGS) customers increased 43% to $4.2 billion in the fourth quarter. NGS refers to “platformization customers,” which are customers who have moved most (or all) of their cybersecurity stack to Palo Alto.

In the past, the cybersecurity industry was fragmented, with many vendors specializing in only certain products, meaning organizations had to piece together their security stack from multiple sources. This opened the door to unacceptable vulnerabilities, so vendors like Palo Alto and CrowdStrike are now focusing on providing a platform to their customers.

Palo Alto says that customers who use all three platforms have 40 times more lifetime value than customers who use just one platform. That represents a huge opportunity, which is why Palo Alto has offered many customers fee-free periods to help them switch from their existing cybersecurity providers. This is a key reason why the company’s overall revenue growth has slowed recently.

In the long run, however, this strategy is likely to pay off enormously.

Why Palo Alto shares are a long-term buy

Palo Alto believes it can do more than triple grow its NGS revenue to $15 billion by 2030, as the company expects up to 3,500 of its top 5,000 customers to adopt a platform approach to cybersecurity by then. The majority of that revenue will be recurring, making Palo Alto’s business more predictable for investors.

Palo Alto’s stock is currently trading at a price-to-sales ratio (P/S) of 15.4, making it 23% cheaper than its main competitor CrowdStrike.

PS ratio data from YCharts

CrowdStrike is consistently growing its total revenue by more than 30%, so the stock could be worth a small premium under normal circumstances. But investors should keep two things in mind:

1. Palo Alto’s NGS revenue grew 43% last quarter and its NGS ARR of $4.2 billion is more than CrowdStrike’s in in total ARRIVAL.
2. CrowdStrike has just experienced one of the most spectacular outages in its history, costing its customers an estimated $5.4 billion. The company has likely taken a major hit, but we won’t know the extent of it until it reports its latest financial results on Wednesday, August 28.

Therefore, I would argue that Palo Alto stock deserves a higher price than it stands today. The current valuation seems like a good entry point for investors, especially those who can stay the course over the next 10 years as the company reaps the rewards of platformization.