Spending on securing the cloud looks set to surge going forward. IT security company Palo Alto (NYSE:PANW), which has two successful cloud security offerings, should see its results improve significantly as this trend unfolds. As a result, the company's stocks look attractive at current levels.
Of course, adoption of the public cloud is growing quite quickly, with Gartner estimating in September 2016 that the worldwide public cloud services market grew 17.2% last year. Moreover, Amazon reported that the revenue generated by its Amazon Web Services unit, the world's leading cloud infrastructure vendor, jumped 55% in the third quarter of last year versus the same period in 2015 to $3.23 billion.
As the footprint of cloud providers expand and as enterprises use the cloud more extensively, it's logical to conclude that spending on cloud security will increase significantly. Indeed, in a July 2016 report, Morgan Stanley predicted that spending on cloud security would rise at a 19% compound annual growth rate from 2015-2019, versus a 3% compound annual growth rate for on-premise security solutions. Furthermore, Barracuda (NYSE:CUDA), which reported stronger than expected results on January 9, indicated that increased demand for cloud security products was a big reason for its success last quarter.
Palo Alto appears to be well-positioned to benefit from increased demand for cloud security. It looks to have pretty close ties with Amazon (NASDAQ:AMZN) Web Services. Last November, the IT security company announced that it would begin enabling "customers to scale their cyberbreach-prevention capabilities as they shift to Amazon Web Services' cloud platform," according to Investopedia. "Under the deal…Palo Alto will now support key AWS features along with joining the AWS Competency Program for Security," Investopedia reported.
Furthermore, two of Palo Alto's key products appear to be geared toward providing cloud security. Specifically, the company's VM-Series next-generation firewall, which is offered through AWS, can protect data in both public and private clouds. The product stops threats from migrating to multiple workloads in all cloud environments,, the company stated. Meanwhile, Palo Alto's Aperture product provides "visibility, contextual risk control, (and) advanced threat prevention" for cloud-based, software-as-a-service products, according to Palo Alto.
Additional evidence of the company's growing attractiveness to cloud users came in November 2016, when its CEO, Mark McLaughlin, announced during its first quarter results conference call that it had made "a large cloud deal with a global systems integrator where we replaced Cisco, Fortinet, and FireEye with a significant investment in both our hardware and subscriptions."
According to McLaughlin, VM-Series has "well over" 2,000 customers and is "uniquely able to" create the same level of security in the cloud as in on-premise devices, making the product very attractive to large enterprises. Additionally, Aperture expanded significantly in Q1, with the product's customer count showing 'strong sequential growth" in Q1, the CEO reported.
Finally, despite the growth of the cloud and other positive catalysts such as the Russian hack of Hillary Clinton's campaign and President-elect Trump's vow to harden the nation's cyber secuirity defenses, Palo Alto stock is well off its highs from 2015. Specifically, the shares now trade around $140, versus the peak of around $197 in 2015. And PANW stock is well off its 52-week high of $165.69.
With the cloud rapidly growing and other positive catalysts on the horizon, PANW stock looks very attractive in the wake of its pullback from its 52-week highs and its 2015 peak.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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