Palo Alto's results reinforce the “AI winner” narrative
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Palo Alto Networks, a leading player in the cybersecurity market, released its quarterly results last Tuesday after the market closed, reporting strong AI-driven demand, similar to that of its competitors. The figures for the quarter just ended exceeded analysts’ estimates, while the forecast for fiscal year 2027 also surpassed expectations in terms of key financial metrics. This strong momentum is likely to continue in the coming quarters, as the spread of AI-enabled cyberattacks and the increasingly widespread use of AI agents are driving up demand for security services. We therefore continue to view the fundamental outlook for this stock — which is also included on our Equity Top Pick List — as strong, and we are raising our fair value estimate from $330 to $400.
Quarterly Report
Following a weak start to the year, Palo Alto — which has risen more than 100% over the past four months — has been reclassified by investors from an “AI loser” software company to an “AI winner,” a shift accompanied by a significant widening of valuation multiples. To support this shift in narrative, however, the company had to demonstrate in its earnings report that artificial intelligence is indeed driving demand and fueling accelerated growth. In this regard, the company did not disappoint; however, a significant portion of these positive developments may already be priced in. Accordingly, there was no substantial positive price reaction following the earnings release, and the stock is trading down about 1% before the market opens.
The cybersecurity company reported revenue of $3.41 billion (+34% YoY), exceeding analysts’ expectations of $3.35 billion. However, the sales figures already reflect the impact of previous acquisitions (Chornosphere, CyberArk), so the organic growth rate may have been slightly lower than that. The acquisitions, however, helped expand the company’s target market into areas such as identity security and observability, which could strengthen its position in solutions developed to protect AI agents. Momentum in this area is accelerating, as evidenced by the fact that the year-over-year growth rate of service revenue accelerated to 36%, making it the main driver of expansion. In addition, product sales — primarily driven by demand for firewall servers — remained strong, as reflected by 29% growth.
The company’s remaining performance obligations (RPO) increased by 34% to $21.2 billion, exceeding analysts’ expectations of $20.95 billion. Adjusted earnings per share came in at $1.02 for the previous quarter, compared to the consensus estimate of 98 cents. In addition, the company announced the acquisition of Console, which helps customers create AI agents that automate internal IT tasks. The acquisition aligns with the company’s active acquisition strategy, while further expanding the total addressable market and supporting longer-term growth prospects.
Looking ahead, the company has set out outlooks that exceed expectations for both the current quarter and fiscal year 2027. Annual revenue could reach $14.15 billion, surpassing analysts’ estimates of $13.84 billion, while annual recurring revenue from next-generation security services could rise to $11.13 billion, compared to expectations of $10.9 billion. The forecast for RPO growth also paints a positive picture, with management anticipating an expansion of nearly 20% in the next fiscal year. In addition, company leadership emphasized that artificial intelligence has placed cybersecurity at the top of IT executives’ priority lists, which is expected to provide a sustained tailwind. Overall, the results support the narrative that the company could be one of the winners of the AI trend, while strong earnings momentum should continue to provide support for the stock.
Investment Thesis
Palo Alto benefits from all major, long-term structural technology trends—including platformization, the spread of cloud-based IT architectures, artificial intelligence, and quantum technology. Its competitive advantage is supported by its extensive enterprise customer base, strong distribution channels, one of the market’s broadest and most integrated security platforms, and its leading market position.
The company is particularly well-positioned in key growth segments, such as the SASE (Secure Access Service Edge) solutions market, which is benefiting from the rapid expansion in demand for cloud-based networking and edge security systems. Palo Alto’s platform strategy deliberately focuses on enterprise customers, promoting deeper integration and long-term customer retention, which also significantly reduces the likelihood that its solutions could be easily replaced—even through AI-based automation.
Based on our current understanding of the company’s product and service portfolio, only a marginal portion of it may be directly exposed to the potentially disruptive effects of artificial intelligence. Even in these areas, a collaborative approach to development appears to be emerging, as indicated, for example, by Anthropic’s Glasswing project and developments surrounding the Mythos model. In light of this, it cannot be ruled out that Palo Alto Networks will eventually integrate Anthropic’s AI solutions into its existing product portfolio, which could even support further growth in demand.
In addition, the company has a particularly attractive presence in the field of AI agent security, especially following its acquisition of CyberArk. Through this acquisition, Palo Alto has integrated one of the most significant players in the identity and access management market into its ecosystem, which provides a strategic advantage in safeguarding the security of autonomous and AI-based systems in the future.
Valuation
The growth outlook is in line with that of its direct competitors: for the 2026–2028 period, the analyst consensus forecasts average annual revenue growth of approximately 20% and FCFF growth exceeding 20%. What stands out are the margins and FCFF growth, and there is room for further expansion on this front in the coming years following the acquisitions.
For software stocks, the so-called “Rule 40” figure is of particular importance; it is calculated as the sum of revenue growth and the FCFF margin, and companies that achieve a value above 40 over the long term outperform their competitors, Palo Alto stands out here with a value of over 60, which is expected to remain sustainable in the medium term as well. All of this may justify a premium valuation, although the company is currently trading at higher multiples compared to its competitors—a situation that may be supported by its strong market position. In addition, the company has a net cash position.
Risks
One of the primary structural risks affecting the cybersecurity sector as a whole is the rise of artificial intelligence, which has the potential to transform industry business models and dampen long-term growth, margins, and predictability. Palo Alto currently holds strong positions in segments that are relatively more protected from AI, such as network security, endpoint protection, and identity security. However, if AI-based solutions were able to meaningfully enter these markets and offer alternatives, it would result in increased competition and declining margins. It is also worth mentioning the integration risks arising from the acquisition of CyberArk.
Equity Top Pick List (updated)
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