Palo Alto Earnings: Broad-Based Demand Drives a Strong Quarter and Outlook

Key Morningstar Metrics for Palo Alto Networks

• Fair Value Estimate

  : $285.00

• Morningstar Rating

  : ★★★

• Morningstar Economic Moat Rating

  : Wide

• Morningstar Uncertainty Rating

  : Very High

What We Thought of Palo Alto Networks’ Earnings

Palo Alto Networks PANW reported very strong third-quarter results, with the firm’s sales growing 31.0% to $3.00 billion and its adjusted operating margins contracting 30 basis points to 27.1%. The firm’s next-generation annual recurring revenue grew 60% to $8.13 billion.

Why it matters: Palo Alto’s business has secular tailwinds. Vendor consolidation, increased artificial-intelligence-driven firewall spending, and spending on securing agentic deployments are solid trends working in the firm’s favor.

• As we have highlighted in prior Fortinet and Palo Alto notes, we see firewall demand increasing as companies outfit their data centers with security equipment. The firm’s trailing 12-month firewall bookings grew 19%, up from 9% a year ago and 11% last quarter.
• We see customers using vendor consolidation to create budget room for AI spending, as it enables firms to maintain their security posture and save costs via bundling while spending more on Palo Alto. Platformized customers represent 65% of NGS ARR, up from around 50% a couple of years ago.

The bottom line: We raise our fair value estimate for wide-moat Palo Alto to $285 per share from $225, driven primarily by an uptick in our near- to medium-term firewall growth estimates. With shares trading up following the report, we see them as trading in the three-star range.

• Over the past couple of months, we have seen the market’s sentiment shift on cybersecurity, with the market’s newfound optimism on cyber being an AI beneficiary aligned with our thesis that we articulated in multiple notes during the first quarter when cyber stocks were selling off.
• Diving deeper into AI-driven demand, we continue to see strong adoption for the firm’s AI-enabled solutions, with the customer count for XSIAM, Palo Alto’s automated security operations solution, up 150% and its ARR up 100% to north of $600 million.