Palo Alto crushes earnings expectations: stock is down 8%- here's why

Palo Alto Networks PANW stock fell 8.3% on Wednesday despite the cybersecurity company reporting stronger-than-expected fiscal fourth-quarter revenue and adjusted earnings, along with an upbeat outlook for fiscal 2027.

The company reported fiscal fourth-quarter revenue of $3.41 billion, up 34% from the prior-year period and above Wall Street expectations of $3.35 billion, according to FactSet.

Adjusted earnings came in at $1.02 per share, compared with analyst expectations of 98 cents.

However, Palo Alto's GAAP results were weaker. The company reported a loss of 35 cents per share for the quarter, compared with a profit of 36 cents per share in the same quarter a year earlier.

Revenue and cash flow remain strong

Palo Alto generated $1.3 billion in free cash flow during the quarter. For fiscal 2026, the company reported $11.5 billion in total revenue, GAAP earnings of 40 cents per share, and free cash flow of $4.1 billion.

While annual free cash flow increased 17%, the company's GAAP earnings declined sharply from $1.60 per share in fiscal 2025 to 40 cents in fiscal 2026.

The company also reported continued growth in its newer security offerings. Annual recurring revenue from its Next-Generation Security portfolio reached $9.1 billion, representing 63% year-over-year growth.

Remaining performance obligations, which represent contracted future revenue that has not yet been recognized, rose 34% to $21.2 billion. That figure was above Wall Street's consensus estimate of $20.91 billion.

BNP Paribas analyst Andrew DeGasperi pointed to Palo Alto's free cash flow margin outlook as a potential source of investor concern.

The company expects a fiscal 2027 free cash flow margin of 37.5% to 38%, which DeGasperi said was below buy-side consensus expectations.

Palo Alto issues upbeat fiscal 2027 guidance

Palo Alto expects fiscal first-quarter revenue of $3.30 billion to $3.31 billion, exceeding the $3.22 billion analyst consensus.

Adjusted earnings are expected to reach 96 cents to 98 cents per share, compared with expectations of 93 cents.

For fiscal 2027, the company forecast revenue of $14.10 billion to $14.20 billion, above Wall Street expectations of roughly $13.8 billion.

Adjusted earnings are projected at $4.16 to $4.19 per share, compared with the $4.11 analyst estimate.

Palo Alto CEO Nikesh Arora said the latest advances in artificial intelligence are pushing cybersecurity higher on chief information officers' priority lists.

He also said AI would provide "durable tailwinds" as the company works toward its $20 billion annual recurring revenue target for Next-Generation Security by fiscal 2030.

Analysts remained constructive on the company's longer-term prospects. Cantor Fitzgerald reiterated its Overweight rating and $425 price target, citing Palo Alto's exposure across network, endpoint, cloud, browser and identity security.

Piper Sandler raised its price target to $410 from $345 while maintaining an Overweight rating.

Analyst Rob Owens described the fiscal fourth quarter as a strong finish, citing upside across major financial metrics and progress integrating recently acquired businesses.

AI demand supports cybersecurity outlook

Palo Alto's shares had already gained 100% this year before Wednesday's decline, raising expectations around the company's growth prospects.

The company said its Prisma AIRS offering had surpassed $100 million in annual recurring revenue, while observability annual recurring revenue exceeded $500 million.

Cantor Fitzgerald said accelerating firewall bookings also pointed to growing demand across the platform.

The strong performance of newer AI-focused security products comes as enterprises seek to protect data and systems from cyberattacks involving increasingly advanced AI capabilities.