Key Points
AI CEOs Elon Musk, Dario Amodei, and Sam Altman highlighted AI risks over the weekend.
Investors are buying cybersecurity stocks to hedge against these risks.
Palo Alto stock is one beneficiary -- but it costs a lot.
Palo Alto Networks (NASDAQ: PANW) stock soared 13.6% through 1:20 p.m. ET Monday after leading AI CEOs Elon Musk, Dario Amodei, and Sam Altman all warned of the dangers of artificial intelligence getting too... artificially intelligent, raising cybersecurity fears.
Investors are flocking to cyber stocks as a potential answer to AI worries, and Palo Alto stock is a prime beneficiary of this trend today.
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Wall Street loves Palo Alto stock
Helping goose Palo Alto's gains, moreover, are two analyst notes encouraging the trend. As StreetInsider.com points out, investment bank Wedbush upgraded Palo Alto stock to outperform last week, setting a $400 price target on the $376 stock. Goldman Sachs is nearly as optimistic, having recently raised its price target to $390 per share based on Q4 earnings.
A third analyst reiterated support for Palo Alto stock last week as well, with Cantor Fitzgerald insisting the stock is worth $425 after a fourth-quarter earnings report that "beat across every guided metric" and that similarly "initiated FY27 guidance above consensus across the board."
Valuing Palo Alto Networks stock
But I'll be honest here: Concerns over an impending AI apocalypse notwithstanding, I have serious reservations about the valuation of this stock.
Palo Alto shares cost 900 times trailing earnings, after all, an on its face ludicrous valuation. Granted, free cash flow is strong, lowering the company's price-to-free cash flow ratio to "only" 66x. That still requires the stock to be growing at very strong double-digit rates to win it a buy in my book, however. The fact that most analysts expect Palo Alto to grow earnings by only 17% annually over the next five years makes the stock look more than 3x overvalued to me.
I would not be a buyer at today's price.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.