Palo Alto Networks Accelerates Growth 31% on AI Demand

Key Points

• Palo Alto Networks is perfectly positioned to benefit from AI in the long term.
• Cybersecurity is the most important layer of the AI software stack, more important than infrastructure.
• Growth trends are accelerating and underpinning healthy cash flow.

Palo Alto Networks NASDAQ: PANW is the #1 AI software play today. While GPUs, connectivity, networking, infrastructure, models, deployment, and application are all critical layers, none of it can happen without cybersecurity. AI changed the playing field, enabling a host of new threats, including data poisoning and IP theft.

Either they make entire systems unreliable or, worse, dangerous to deploy and operate. As it stands, the cost of cybercrime is rising dramatically, with estimates that it will top $23 trillion as soon as next year. With the average cost per business running into the millions, it's easy to see the value of a robust cybersecurity program.

Within this, Palo Alto Networks is the leading provider in a highly fragmented market. It is the largest pure-play, commanding approximately 9% market share, and actively shifting with AI’s development. The critical factor is platformization; it enables the unification of disparate security needs into a single, comprehensive, easy-to-use package. Benefits are enhanced protection, as data is shared across systems, reduced complexity, and lower costs. AI-specific tools include Prisma AIRS, an AI-native platform that scans and manages AI models, and Cortex Cloud, a cloud-native platform providing real-time detection, prevention, and agentic automation.

Palo Alto Accelerates on Heels of AI Deployments

Palo Alto Networks gave the market all it could have asked for in the fiscal Q3 earnings release. The company accelerated growth to 31% year-over-year (YOY)—also an acceleration from the prior quarter—bringing in approximately $3 billion in net revenue. Gains were made in next-gen products, which grew by 60%, including the impacts of acquisitions. Product and Subscriptions, the two operating categories, each grew by high double digits and are expected to remain strong in the upcoming quarters. Remaining performance obligation (RPO) provided high-level visibility, up 36% to nearly $18.5 billion, sufficient for six quarters' business at the company's fiscal Q3 pace.

The margin news was mixed as the GAAP results were impacted by numerous one-offs, many of them non-cash, including accelerated share-based compensation and acquisition-related adjustments. The adjusted figures revealed clear strength, with accelerated growth across all comparisons. The company’s earnings were impacted by credits and incentives related to the platformization process, but to a far lesser extent than expected. Adjusted earnings per share were 85 cents, up 5 cents YOY and 5 cents better than expected; a 430-basis-point improvement in the trailing 12-month free cash flow margin; and a 57% increase in quarterly free cash flow.

Guidance is why this stock will continue to advance in 2026. Executives issued a hot forecast for the company's fiscal Q4, lifting full-year revenue and earnings targets above consensus. The likely outcome is that the company outperforms and sustains the bullish analyst trends.

Analysts Lift PANW Price Targets After Meaningful Acceleration

Analysts are responding bullishly to the news. The first revisions tracked by MarketBeat include substantial price target increases, pushing the high end of the target range higher. Among the takeaways were a new high target of $375 from Truist Financial and a general expectation of meaningful business acceleration in fiscal 2027. As it stands, the consensus target is rising quickly and sits slightly above current trading levels.

Other takeaways include a statement from Wedbush analysts that they are buyers on knee-jerk weakness in the price. Other buyers include the institutional group, which has been accumulating for three consecutive months. They provide a strong tailwind for price action by owning approximately 80% of the stock and buying at a $5-to-$1 rate in 2026, limiting downside risk.

Chart price action is robust. PANW shares have rocketed from the 2026 lows, supported by elevated volume, and show strength across indicators. The MACD, specifically, reveals a strengthening market with its convergence, suggesting more upside to come. The post-release price action is providing some relief; a near-term top may have been reached; the question is how deep a sell-off may reach, and the charts suggest it won’t be far. A series of four consecutive, large green candles shows aggressive accumulation and a market likely eager for any price weakness.

The biggest risk for investors this year is the dilutive impact of acquisitions. The company not only leans heavily on share-based compensation, but significantly increased its share count to fund the CyberArk and Chronosphere acquisitions. The impact in Q3 was worth more than 13% in new shares, but was offset by the equity gain. Palo Alto's cash flow supports financial health while enabling aggressive investment, with fiscal 2026 activity resulting in a 3.5X, or 250%, increase in shareholder value.