Many investors have shunned cybersecurity stocks over the past year or so as they’ve tried to assess how the companies will be impacted by artificial intelligence (AI). Evaluating companies and the markets they serve is a wise strategy, but with many cybersecurity stocks plunging recently, some investors have shifted more into panic mode than simple evaluation.
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Palo Alto Networks(NASDAQ: PANW) is an established cybersecurity company that’s made some big moves to shore up its position in the market, including its $25 billion purchase of CyberArk last year to get the company’s top-notch identity and access management security features.
Palo Alto is also looking to AI for growth. Palo Alto CEO Nikesh Arora said last month that the company saw “continued strength in platformizations, a trend that is accelerating due to AI — customers are keen to both modernize and normalize their cybersecurity stack, aligning them to our approach.” Arora added that as more customers adopt AI security, the company “will be a long term trend.”
The company’s Prisma AIRS artificial intelligence security platform has become a popular tool in its security arsenal, with the number of customers using the platform tripling in just one quarter. The company’s second-quarter results revealed just how in demand its security products are, with sales rising 15% from the year-ago quarter to $2.6 billion, and diluted earnings popping nearly 61% to $0.61 per share.
Management is guiding for continued growth this year, with total sales expected to be about $11.3 billion in 2026, a nearly 23% increase from last year. What’s more, Palo Alto’s leadership expects the company to continue its high profitability, with a non-GAAP operating margin of about 29% for the year.
Investors have been skittish about cybersecurity stocks as they try to figure out how AI will affect them, and that’s helped drive Palo Alto’s shares down 20% over the past year. With such a dramatic pullback despite Palo Alto’s strong position in security and high profitability, now looks like a good time to pick up some shares of the company.
Microsoft(NASDAQ: MSFT) doesn’t break out its cybersecurity sales directly, but estimates for 2025 put its security revenue at about $37 billion, with the potential to reach $50 billion annually by 2030, and Microsoft said recently it now has 1.6 million global security customers.
I think Microsoft is in one of the best positions to benefit from an increasingly complex world of AI threats because its security business is tied so closely to its cloud computing business. Microsoft’s Azure is the second-largest cloud computing company behind Amazon with 21% market share, and continues to gain ground on its rivals. As the AI cloud market grows to nearly $2 trillion by 2030, Microsoft is likely to add more cybersecurity customers as clients get locked into the company’s cloud ecosystem.
What’s more, as an AI leader with its Copilot chatbot, Microsoft can implement artificial intelligence into its cybersecurity software and services in a way that other software companies can only dream of. For example, Microsoft recently introduced its Agent 365, an AI agent that enterprise customers can use to govern their existing security services, using the same controls they already use for Microsoft 365 and its Azure cloud. One of Microsoft’s customers its the company’s AI agent to reduce the time to triage cybersecurity threats by 75%.
Sweetening the deal for investors is that Microsoft’s shares have a price-to-earnings (P/E) ratio of just 25 right now, far cheaper than the tech sector’s average P/E ratio of 39. Its shares have been flat over the past year, but with its leading position in security, paired with AI and cloud opportunities, the stock is a great long-term buy.
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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
