Palo Alto beats estimates, but stock slips despite AI security boom

Palo Alto Networks PANW shares fell on Wednesday despite the cybersecurity company reporting fiscal third-quarter results that exceeded Wall Street expectations and raising its outlook.

Investors appeared to focus on acquisition-driven growth and broader market pressures, sending the stock lower despite the earnings beat.

The stock was down about 4% in trading on Wednesday after initially rising in after-hours trading following the earnings release.

The decline came even as Palo Alto reported stronger-than-expected revenue, earnings, backlog growth, and guidance.

For the quarter, Palo Alto posted adjusted earnings of 85 cents per share, ahead of analyst estimates of 80 cents.

Revenue rose 31% year over year to $3 billion, topping expectations of $2.94 billion.

The company also reported a backlog of $18.4 billion, up 36% from a year earlier and above analyst forecasts.

Revenue growth boosted by acquisitions

Palo Alto's strong top-line growth was supported by recent acquisitions, including identity security company CyberArk and cloud observability platform Chronosphere.

According to the company, approximately $388 million of quarterly revenue came from the CyberArk and Chronosphere acquisitions. Excluding acquisition contributions, organic revenue growth was 14%.

The company reported a net loss of $177 million, or 22 cents per share, compared with net income of $262 million, or 37 cents per share, in the same period last year.

Palo Alto also issued stronger-than-expected guidance.

The company forecast fourth-quarter revenue between $3.35 billion and $3.36 billion, above analyst estimates of $3.28 billion.

It also raised its full-year revenue outlook to a range of $11.42 billion to $11.43 billion.

“Our results surpassed every guided metric, fueled by an acceleration in organic bookings momentum, the sustained tailwinds from our platformization strategy, and surging cybersecurity needs as AI transitions from experimental stages to enterprise-wide production,” Chief Executive Officer Nikesh Arora said during the earnings call.

AI security demand remains a major growth driver

The results arrive amid ongoing debate about the impact of artificial intelligence on software companies.

Palo Alto and other cybersecurity firms have argued that AI is creating new security challenges rather than reducing demand for security products.

“The latest advancements at the AI frontier have increased the level of urgency around cybersecurity, and redefined the shape of the industry for the coming years,” Arora said in a statement.

The company has expanded aggressively into AI-related security through a series of acquisitions over the past year.

CyberArk, acquired in a deal valued at roughly $25 billion, is viewed as a key part of Palo Alto's strategy to address identity security risks associated with AI agents.

Arora also pushed back against concerns that AI could disrupt the cybersecurity sector, telling analysts that the “SaaSpocalypse” for cyber is “dead.”

Analysts remain cautious despite strong results

While Palo Alto's results topped expectations, some analysts remain cautious about the sustainability of growth driven by acquisitions.

Loop Capital raised its price target on the stock to $290 from $160 while maintaining a Hold rating.

The firm noted that much of the quarterly upside came from CyberArk and Chronosphere and said the company provided limited information about the long-term growth outlook for the acquired businesses.

According to Loop Capital, the company's hardware firewall business performed strongly, although questions remain about whether that momentum can be sustained.

The firm also said increasing reliance on acquisitions could make it more difficult for investors to evaluate Palo Alto's underlying organic growth trends in future quarters.

Despite Wednesday's decline, Palo Alto shares remain one of the strongest performers in the cybersecurity sector, having gained more than 60% this year as investors continue to bet on rising demand for AI-driven cybersecurity solutions.