Palo Alto Networks: Buy The Dip, Long-Term Tailwinds Ahead

Key Points

• Palo Alto Networks' stock price decline in late May opened a buying opportunity that was not likely to last long.
• The Q3 performance and guidance were strong; only analysts expected the strength. Long-term trends are intact.
• Cash flow, equity gains, and analysts' revisions suggest this stock will hit a new all-time high in 2025. 

Palo Alto Networks’ NASDAQ: PANW stock price plunged following the Q3 release and guidance update because the results and update were as expected. News, as expected, is not a catalyst for higher share prices but can sustain an uptrend if positive. In this case, the news is very positive and reflects the dual tailwinds of the company’s platformization strategy and the advancement of AI. 

Platformization means aggregating cybersecurity services and features into a single, easy-to-access, simple-to-use platform. In contrast, advancing AI means an ever-increasing need to secure software development, data, and digital systems, compounded by digital services' expanding use and deepening penetration.

The net result for Palo Alto is sustained double-digit systemwide growth led by its Next Gen security features, and guidance for those trends to continue. 

Palo Alto Networks Performs Well Versus High Expectations

Palo Alto Networks posted a robust quarter, sustaining its 15% Q3 growth pace relative to last year and accelerating for the 4th consecutive quarter. Its revenue outpaced MarketBeat’s consensus estimate by 50 basis points, led by strength in the Next Gen offerings.

Next Gen ARR, an indication of subscription strength, grew by 34% to cross the $5 billion mark for the first time. Remaining performance obligation, another indication of business strength, rose by nearly 20%. Segmentally, Products and Subscription & Services were strong across the network, with Product up by 16% and Subscriptions by 15%. 

The margin news is also good. Although analysts are concerned about the gross margin, which contracted by roughly 120 basis points, it remains strong at 72.9%. More importantly, cost pressures are offset by increasing leverage, more efficient operations, and expense discipline, which resulted in leveraged bottom-line results.

The adjusted net income rose by 20% and adjusted earnings by 21% to $0.80, outpacing the consensus and expected to remain strong in FQ4. 

The guidance is a hurdle for sentiment in the near term, with the revenue forecast in alignment with the consensus. However, guidance forecasts another quarter with growth of nearly 15% and earnings to remain strong. The forecast for adjusted EPS has the consensus at the low end, and both forecasts may be cautious, given the trends.

Cybersecurity spending is expected to accelerate in 2025 and 2026 to meet increasingly sophisticated attacks at an increasingly fast pace. 

Despite Mixed Messages, Analysts' Conviction in PANW Uptrend Firms

The analysts' revisions following the Q3 update are mixed, but the net result is bullish. Although a handful of analysts have lowered their price targets for the stock, more have increased them, and the net result is a firming belief that this stock will trade above $200.

The trimmed average of revisions tracked by MarketBeat issued within the first day of the release is $210, 200 basis points above the pre-release consensus target, sufficient for a new all-time high and gain of more than 15%.

The price action following the release is a knee-jerk reaction to as-expected news that is otherwise solid and aligns with the uptrend. The takeaway is that a buying opportunity was opened; the question is how long it will last.

The move is already at a critical support target, so it may not last long. In this scenario, the market for PANW stock could advance to the $195 to $200 level quickly and potentially move up to a new high soon after. 

Palo Alto Networks isn’t a capital-returning machine but is building leverage for investors. The company’s cash flow is positive, allowing for self-funded growth and significant equity gains on the balance sheet.

At the end of FQ3, the highlights include a 10% increase in assets compounded by reduced liability, virtually no long-term debt, and a 40% increase in shareholder equity.