Palo Alto dips after strong quarter — why we’re bullish on next year
Shares of Palo Alto Networks fell on Wednesday, even after the cybersecurity company reported better-than-expected quarterly results and raised its full-year outlook. However, the stock is no stranger to post-earnings dips and usually recovers losses quickly. This time should be no different. Revenue for the company’s fiscal 2026 first quarter increased 16% year over year to $2.48 billion, exceeding the Wall Street consensus estimate of $2.46 billion, according to LSEG. Adjusted earnings per share (EPS) increased 19% to 93 cents in the quarter, ahead of the 89-cent LSEG consensus estimate. Shares fell more than 3% in after-hours trading to about $194. It was up nearly 10% for the year entering earnings. PANW 1Y mountain Palo Alto 1-Year Return Bottom line “As many of you saw last week, with one of the major AI platforms, AI hackers aren’t a future threat; they’re here now. This is the first reported case of an AI agent autonomously conducting a large-scale nation-state cyberattack,” CEO Nikesh Arora said on the earnings call, referencing a hacker who used Anthropic’s Claude chatbot to launch a cybercrime. “The attacker was able to manipulate an agent to take steps on its own with minimal human intervention,” Arora continued. “This is a turning point, proof that attackers are already weaponizing AI agents at scale, even more importantly, they are able to attack fast and will be able to exfiltrate faster.” We’re starting off our earnings recap with this story because it highlights why Palo Alto’s security platform wins in this new world. Bad actors are becoming more sophisticated because of artificial intelligence, and Palo Alto’s platform approach makes it one of the few providers capable of detecting, protecting, and remediating threats. “Fragmentation creates friction, which in turn causes latency,” Arora said. “Latency is a critical enemy of real-time cybersecurity. This is the backdrop that informs our strategy as we go forward.” For the quarter, Palo Alto Networks posted beats across every single key metric: revenue, adjusted EPS, adjusted free cash flow margin, next-generation security annual recurring revenue (ARR), and total remaining performance obligation (RPO). On top of that, the company raised its full-year revenue and adjusted earnings per share outlook, which is something you don’t always see from companies one quarter into the fiscal year. There’s real momentum here, and we expect that will continue after the company closes its pending acquisition of CyberArk. Some of the company’s newer products from past acquisitions are also gaining traction quickly. The number of customers using its Secure Browser is up more than 7 times year over year, and Prisma Air’s deals were up more than 100% quarter over quarter. So why is the stock down 3%? Investor expectations are always high for these top-performing cybersecurity stocks, leading to post-earnings pullbacks that don’t last long. The market quickly recognizes that these companies have strong long-term outlooks due to the critical need for greater cybersecurity spending by enterprises of all sizes. The market may also not like that Palo Alto announced a new multibillion-dollar acquisition while it’s already working to close the CyberArk deal, which is the largest in the company’s history. But Arora is a dealmaker with a strong track record of successfully integrating new products into the broader platform — it’s one of the reasons we’re invested in the stock — so we’re not too worried about execution risk. We’re reiterating our 1 rating and $225 price target. Why we own it We believe cybersecurity is a secular growth market, as bad actors are relentless and companies simply cannot afford not to invest in defense. It is a never-ending arms race. We believe Palo Alto Networks, in particular, is uniquely positioned to thrive due to its best-in-class tools and broad product portfolio, which enable it to offer an all-encompassing “platform” solution for cybersecurity. Competitors : CrowdStrike (also a Club stock), Fortinet , Cisco Systems Last buy : Aug. 25, 2025 Initiation : Feb. 15, 2023 Commentary One focus of Palo Alto Networks’ earnings presentation was “platformization,” a strategy Arora coined over a year and a half ago that aims to get customers to buy entire suites of products and consolidate their cybersecurity spending with the company. It’s a change from the old way client companies used to buy individual products from different cybersecurity vendors. By accelerating its platform strategy, Palo Alto has said it would lead to more market share, bigger deals, higher ARR per customer, better security outcomes, and lower churn rates. Palo Alto Networks added about 60 net new platformizations in the quarter, bringing its total count to about 1,450. That’s up from about 1,100 one year ago, keeping it on track to reach 2,500 to 3,500 total platformizations by fiscal year 2030. One of the big platformization wins in the quarter was a $33 million SASE deal with a U.S. cabinet agency. The company said this deal displaced a major SASE incumbent that couldn’t provide unified visibility across the firewall and remote endpoints. Palo Alto also scored a $100 million deal with a large telecom provider. This deal included a $85 million commitment to the company’s Extended Security Intelligence and Automation platform, or XSIAM, which was the largest deal in Palo Alto’s history. In addition, the company won a $29 billion deal with a large European defense company, consolidating its network security spend. “The common theme across these large transactions is clear,” Arora said. “Customers are moving from managing vendor sprawl to demanding superior demonstrable security outcomes through platformization.” Palo Alto also announced a new acquisition, Chronosphere, which management described as “a next-generation observability platform built to scale for the AI era” for a total consideration of $3.35 billion. Chronosphere had ARR of over $160 million at the end of September, with triple-digit year-over-year growth. Arora said the 17-year-old observability industry, which helps companies monitor internet applications, was not designed for the AI era and is too costly. Chronosphere is built for cost optimization and can provide industry-leading solutions at one-third of the cost, Arora noted. Palo Alto Networks estimates the observability industry’s current total addressable market is $24 billion and will grow to $32 billion in 2028. The company’s CyberArk deal, approved by shareholders on Nov. 13, is on track to close in the third quarter of fiscal year 2026. CyberArk reported a strong quarter earlier this month with record net new ARR. The market hated the CyberArk acquisition when it was first announced in late July, sending Palo Alto shares to the low $170s. We didn’t understand the concerns: CyberArk is one of the best identity security companies. Palo Alto Networks is playing offense by adding security to its portfolio ahead of the market’s expected expansion due to the emergence of agentic AI and the new threats it is expected to bring. Guidance The company’s outlook for the fiscal 2026 second quarter was in line with or better than expectations across all major line items. Revenue in the range of $2.57 billion to $2.59 billion, in line with the consensus estimate of $2.58 billion. Adjusted EPS in the range of 93 cents to 95 cents, which at a midpoint of 94 cents beats the consensus estimate of 93 cents. Next-gen security ARR of $6.11 billion to $6.14 billion, which is slightly ahead of the consensus estimate of $6.12 billion. RPO of $15.75 billion to $15.85 billion, which is roughly in line with the consensus estimate of $15.78 billion. Palo Alto’s guidance for the full-year fiscal 2026 was also in line with or slightly better than expectations. Total revenue, which is now expected to be in the range of $10.50 billion to $10.54 billion, up from the prior range of $10.48 billion to $10.53 billion. The new midpoint of $10.52 billion is in line with the consensus estimate. Non-GAAP earnings per share (EPS) in the range of $3.80 to $3.90, which is up from the prior range of $3.75 to $3.85. The new midpoint of $3.85 is above the consensus estimate of $3.81. Next-Generation Security ARR, remaining performance obligation, and adjusted free cash flow margin were unchanged. (Jim Cramer’s Charitable Trust is long PANW. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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