We’re upping our Palo Alto price target after strong earnings vanquish AI disruption fears
Palo Alto Networks reported a strong beat-and-raise quarter Tuesday night, putting to rest any lingering doubt that it will be disrupted by artificial intelligence. The stock was volatile in after-hours trading, but considering its blistering rally into earnings, it’s not surprising to see this kind of reaction. Revenue for the company’s fiscal 2026 third quarter increased 31% year over year to $3 billion, exceeding the Wall Street consensus estimate of $2.94 billion, according to LSEG. Adjusted earnings per share (EPS) increased 6% to 85 cents in the quarter, ahead of the 80-cent LSEG consensus estimate. Shares were roughly flat but volatile in after-hours trading. Pal Alto is up about 61% for the year and up 85% since the end of March. Why we own it Cybersecurity is a secular growth market as bad actors are relentless and companies simply cannot afford to not invest in defense. It is a never-ending arms race, made only more important by the proliferation of artificial intelligence. Palo Alto Networks has best-in-class tools and a broad product portfolio that allows it to provide an all-encompassing “platform” solution to cybersecurity. Competitors : CrowdStrike (also a Club stock), Fortinet , Cisco Systems Last buy : Nov. 24, 2025 Initiation : Feb. 15, 2023 Bottom line We battled this one out earlier this year when the stock was hammered over fears that large language models made by the likes of Anthropic were going to provide cybersecurity solutions to everyone and replace established security vendors like Palo Alto Networks. It’s a thesis we never bought into, but we do admit it did test our patience. How did sentiment change so quickly? The company’s opportunistic share repurchases, including a $1 billion increase to its buyback authorization in February, didn’t help the stock. It got a brief pop after the disclosure that CEO Nikesh Arora bought $10 million worth of shares in late March, when the stock was trading in the $140s. But it wasn’t off to the races yet. What finally got the market on our side was the launch of Project Glasswing , an initiative formed in early April by Anthropic and several major partners to address the heightened risks associated with users of its most advanced frontier model, Claude Mythos . Yes, the same Anthropic that was once seen as a boogeyman. As management explained in its earnings presentation, the creation of models like Mythos has been a “game changer” for the industry. “We have entered the era of truly cyber capable systems, where models like Mythos possess the autonomous capability to execute comprehensive attack campaigns from start to finish. This represents a fundamental paradigm shift for the cybersecurity industry.” Arora explained on the earnings call. The company said it has had over 800 customer meetings in the last six weeks to help customers work through their cybersecurity future in a post-Mythos world, and many of those meetings are leading to interest in its Cortex and Agentic Endpoint Security Platforms. For context, Arora told Jim Cramer on “Mad Money” that Palo Alto held 1,200 customer meetings all of last year . Rapid advancements in AI like the Mythos model may have “increased the terminal value of the entire cybersecurity industry,” according to Arora. The terminal value is, essentially, the “forever” value of the business, stretching out beyond a reasonable earnings forecast period. That’s no doubt encouraging. But we still need to see strong execution, with companies delivering on their product roadmaps and deal integration. Last quarter , the narrative against Palo Alto Networks was all its dealmaking was diluting earnings too much. This time around, management demonstrated these deals have expanded its total addressable market. We were pleased to see the company show how its well-timed acquisition of CyberArk is far ahead of plan one quarter after its close. Announced in late July, Palo Alto Networks’ $25 billion acquisition of this identity-security leader was a pivotal move that positioned the company to secure AI agents, which capable of operating autonomously to complete tasks on behalf of human users. CyberArk’s annual recurring revenue is up 27% year over year, and management believes it’s three to six months ahead of plan on its synergy targets. That keeps the company on track to achieve a 40% free cash flow margin in fiscal year 2028. Chronosphere was a smaller deal, but still one of great importance to gain exposure to the observability market, which is important as the amount of data companies need to see and secure grows. In validation of the strategic move, management reiterated two of the top five frontier labs are using the product. The acquisition was announced in November and completed in January. The bottom line is that if you want to be anointed as an AI stock, you have to prove that AI is accelerating your business. Palo Alto did exactly that, reporting an acceleration in organic bookings growth while demonstrating why its recent acquisitions are increasingly important in the AI era. Total remaining performance obligation (RPO) increased 36% year over year, or 22% when excluding CyberArk and Chronosphere. RPO represents business signed but not yet converted into revenue. Meanwhile, next-generation security annual recurring revenue (ARR) increased 60% year over year, or 28% when excluding the two deals. The business momentum is clear here, justifying the stock’s strong performance over the past four to five weeks. The stock may be trading sideways in after-hours trading, but it had just gone parabolic, creating high expectations. We’ll huddle to decide if we need to change our rating, but we are increasing our price target to $325 from $255. Commentary The trend toward vendor consolidation — dubbed “platformization” by Palo Alto — remains alive and well. In the quarter, Palo Alto Networks added about 110 net new platformizations in the quarter, including 20 from identity and observability — think CyberArk and Chronosphere. This brought its total platform deals to about 1,650, with another 630 from identity and observability. Given where they stand today, management said its confident in surpassing 4,000 platforms with $20 billion in next-generation ARR by fiscal year 2030. One of the big deals in the quarter was a more than $200 million ARR expansion deal with a leading frontier AI lab for observability. Another key win was an $80 million deal with a leading U.S. electric utility that’s important to the AI data center buildout. This company expanded its next-gen firewall spend and selected secure access service edge (SASE) for more than 25,000 employees. A third win was a $40 million deal with a global telecommunications provider, which purchased extended security intelligence and automation management (XSIAM) for AI modernization of its security operations center; it also consolidated multiple point products. A fourth deal highlighted was a more than $20 million deal with a leading global consulting firm, which selected its AI security platform, known as Prisma AIRS , to secure AI apps and agents. By product, Palo Alto’s network security business recorded one of its strongest quarters in recent memory, with firewall bookings growth up 19% year over year and SASE ARR up 40% year over year. Another highlight was Prisma AIRS, which has become the fastest growing product in company history thanks to the more than 300 customers that have signed up for it. That’s triple the customer count from one quarter ago. Palo Alto announced Prisma AIRS in late April 2025. Guidance The company’s outlook for the fiscal 2026 fourth quarter came in above FactSet estimates across every line item. Revenue in the range of $3.345 billion to $3.355 billion, above the consensus estimate of $3.282 billion. Adjusted EPS in the range of 96 cents to 98 cents, which at a midpoint of 97 cents beats the consensus estimate of 94 cents. Next-gen security ARR of $8.9 billion to $8.95 billion, which is well above the consensus estimate of $8.57 billion. RPO of $20.9 billion to $21 billion, which is above the consensus estimate of $20.25 billion. Palo Alto raised its full year outlook to the following: Total revenue is now expected to be in the range of $11.415 billion to $11.425 billion, up from the prior range of $11.28 billion to $11.31 billion. Non-GAAP earnings per share (EPS) in the range of $3.77 to $3.79, which is up from the prior range of $3.65 to $3.70. Next-gen security ARR to $8.9 billion to $8.95 billion, which is up from the prior range of $8.52 billion to $8.62 billion. RPO of $20.9 billion to $21 billion, up from the prior range of $20.2 billion to $20.3 billion. (Jim Cramer’s Charitable Trust is long PANW and CRWD. 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. 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