Palo Alto slips 3%: Why this analyst still sees it as a top cyber pick

Palo Alto Networks Inc. PANW is emerging as one of Wall Street's preferred cybersecurity plays as concerns over increasingly powerful artificial intelligence models drive demand for security products and services.

The view follows comments from International Business Machines (IBM), which said last week that enterprise customers are placing greater emphasis on cybersecurity as more advanced AI models enter the market.

In a research note published Monday, William Blair named Palo Alto Networks its top pick in the cybersecurity sector, arguing that AI is creating more demand for cybersecurity solutions rather than reducing it.

Palo Alto shares fell about 3% to $338.19 on Tuesday after declining 2.8% in the previous session.

Despite the recent pullback, the stock has gained 83% this year and has posted gains in each of the past four months.

AI concerns boost demand for cybersecurity products

William Blair said discussions with private companies, resellers, industry participants and thought leaders pointed to strong cybersecurity spending during the second quarter.

The firm attributed the trend to increasing concerns surrounding Anthropic's Mythos AI model, demand for firewalls ahead of expected price increases and broader worries about AI-driven cyber threats.

Analyst Jonathan Ho wrote, "We are seeing a dramatic shift in prioritization as customers rush to purchase firewalls ahead of expected price increases and as supply chain challenges loom in the background."

The firm also said cybersecurity has become a higher priority following the release of Anthropic's Mythos model and Nvidia's next-generation Blackwell AI architecture.

According to William Blair, spending has been particularly strong for companies offering firewall products and vulnerability management services.

"We believe the strong near-term performance in security stocks following last quarter’s declines suggests that cybersecurity is now perceived as a beneficiary of AI," Ho wrote.

The report noted that vulnerability management has become a leading concern for customers, while spending on AI security and zero-trust projects has temporarily taken a back seat as organizations focus on addressing immediate risks associated with new AI models.

Palo Alto remains William Blair's top cybersecurity pick

William Blair maintained an Outperform rating on Palo Alto Networks, citing its competitive position and favorable demand trends.

"We believe Palo Alto continues to take share in the market and benefits from customers deciding to pull the trigger early as the perception is that price increases are coming and backlog/lead times are building," Ho wrote.

The firm said stronger firewall demand should support growth in both annual recurring revenue and product revenue, although rising hardware firewall component costs could weigh on margins.

William Blair also believes AI presents a long-term growth opportunity for established cybersecurity companies.

"AI offers a significant opportunity longer term, as platform vendors appear best positioned from a trust perspective to bring security for AI to customers," Ho wrote.

He added that it was "unlikely" that frontier AI model developers would replace traditional cybersecurity providers.

Analysts raise price targets after strong performance

Palo Alto has also received a series of higher price targets from other Wall Street firms in recent weeks.

Tigress Financial Partners raised its target price to $430, citing the strength of the company's AI-driven platform following its third-quarter results.

Evercore ISI increased its target to $415 after positive channel checks and expectations for future free cash flow generation.

Needham also lifted its price target to $425, pointing to optimism surrounding the company's fiscal 2027 growth outlook following discussions with management.