We’re upping our Palo Alto price target after strong earnings vanquish AI disruption fears
Palo Alto Networks reported a strong hit-and-raise quarter on Tuesday night, dispelling any lingering doubts that it would be disrupted by AI. The stock has been volatile in after-hours trading, but given the rapid rise in earnings, it’s not surprising to see such a reaction. According to LSEG, revenue for the company’s third quarter of fiscal 2026 rose 31% year over year to $3 billion; this beat Wall Street’s consensus estimate of $2.94 billion. Adjusted earnings per share (EPS) rose 6% to 85 cents in the quarter, above LSEG’s consensus estimate of 80 cents. Shares were roughly flat but volatile in after-hours trading. Pal Alto is up nearly 61% for the year and 85% since the end of March. Why we have this Cybersecurity is an ever-growing market where bad actors are relentless and companies can’t afford not to invest in defense. This is a never-ending arms race that has become even more important with the proliferation of artificial intelligence. Palo Alto Networks has best-in-class tools and a broad product portfolio that allows it to deliver an all-encompassing “platform” solution for cybersecurity. Competitors: CrowdStrike (also a Club stock), Fortinet, Cisco Systems Last purchase: November 24, 2025 Started: February 15, 2023 As a result, we took this fight at a time when the stock took a hit earlier this year on fears that big language models produced by companies like Anthropic would provide cybersecurity solutions to everyone and displace established security providers like Palo Alto Networks. This is a thesis we have never embraced, but we admit that it tests our patience. How did feelings change so quickly? The company’s opportunistic share buybacks, including a $1 billion increase in repurchase authority in February, haven’t helped the stock. There was a brief boom following the announcement that CEO Nikesh Arora had purchased $10 million worth of shares in late March, when the stock was trading at $140. But he hadn’t started racing yet. What finally brought the market to our side was the launch of Project Glasswing, an initiative created by Anthropic and several major partners in early April to address the increasing risks associated with users of the state-of-the-art edge model Claude Mythos. Yes, the same Anthropic who was once considered the bogeyman. As management explained in its earnings presentation, the creation of models like Mythos has been a “game changer” for the industry. “We have entered the era of truly cyber-capable systems, where models like Mythos have the autonomous capability to execute comprehensive attack campaigns from start to finish. This represents a fundamental paradigm shift for the cybersecurity industry.” Arora explained on the earnings call. The company said it has held more than 800 customer meetings in the past six weeks to help customers work on their cybersecurity future in a post-Mythos world, with many of those meetings sparking interest in its Cortex and Agentic Endpoint Security Platforms. For context, Arora told Jim Cramer on “Mad Money” that Palo Alto held 1,200 client meetings over the past year. Rapid advances in artificial intelligence, such as the Mythos model, may have “increased the bottom line value of the entire cybersecurity industry,” according to Arora. Terminal value is essentially the “forever” value of the business and extends beyond a reasonable earnings forecast period. This is undoubtedly encouraging. But we still need to see a strong implementation where companies fulfill their product roadmaps and deal integrations. Last quarter, the narrative against Palo Alto Networks was that the deals diluted earnings too much. This time, management showed that these deals expanded its total addressable market. We were pleased to see that the company showed a quarter after closing that it was well ahead of plan with its well-timed acquisition of CyberArk. Palo Alto Networks’ $25 billion acquisition of this identity security leader, announced in late July, was a pivotal move that positions the company to secure AI agents that can operate autonomously to complete tasks on behalf of human users. CyberArk’s annual recurring revenue increased 27% over last year, which management believes is three to six months ahead of plan on synergy targets. This puts the company on track to achieve a 40% free cash flow margin in fiscal 2028. Chronosphere was a smaller deal but still a big deal for entering the observability market; This is important as the amount of data companies need to see and secure increases. While confirming the strategic move, management reiterated that two of the top five leading laboratories are using this product. The acquisition was announced in November and completed in January. Ultimately, if you want to be known as an AI stock, you need to prove that AI is accelerating your business. Palo Alto has done just that, reporting an acceleration in organic booking growth while showing why its recent acquisitions are becoming increasingly important in the age of artificial intelligence. Total remaining performance obligation (RPO) increased 36% over last year, or 22% excluding CyberArk and Chronosphere. RPO represents work that has been signed but has not yet been converted into revenue. Meanwhile, next-generation security annual recurring revenue (ARR) was up 60% year-over-year, or 28% excluding two deals. Business momentum is clearly evident here, justifying the stock’s strong performance over the last four to five weeks. The stock may have been trading sideways in after-hours trading, but it went parabolic, creating high expectations. We will meet to decide whether we should change our rating, but we are increasing our price target from $255 to $325. Commentary The trend toward vendor consolidation, which Palo Alto calls “platformization,” is alive and well. This quarter, Palo Alto Networks added approximately 110 net new platformizations, 20 of which were identity and observability; Think CyberArk and Chronosphere. This brings the total platform deals to approximately 1,650; the other 630 came from identity and observability. Given where they are today, management said they are confident of surpassing 4,000 platforms with $20 billion in next-gen ARR by fiscal 2030. One of the largest deals this quarter was a $200+ million ARR expansion deal with a leading AI lab for observability. Another major win was an $80 million deal with a leading U.S. power company, key to the construction of an AI data center. This company expanded its next-generation firewall spend and selected secure access service endpoint (SASE) for its 25,000+ employees. The third win was a $40 million deal with a global telecommunications provider that purchased extended security intelligence and automation management (XSIAM) for AI modernization of its security operations center; It also consolidated multi-point products. The fourth deal highlighted was a more than $20 million deal with a leading global consulting firm that selected the AI security platform known as Prisma AIRS to secure AI applications and agents. By product, Palo Alto’s network security business posted one of its strongest quarters in recent memory, with firewall bookings up 19% year over year and SASE ARR up 40% year over year. Another standout product was Prisma AIRS, which became the fastest growing product in the company’s history, with more than 300 customers signing up. That’s three times the number of customers from a quarter ago. Palo Alto announced Prisma AIRS in late April 2025. Guidance The company’s outlook for the fourth quarter of fiscal 2026 exceeded FactSet estimates on every item. Revenue came in between $3.345 billion and $3.355 billion, above the $3.282 billion consensus estimate. EPS adjusted range of 96 cents to 98 cents; That beats the 94-cent consensus estimate at the 97-cent midpoint. Next-generation security ARR is between $8.9 billion and $8.95 billion, well above the $8.57 billion consensus estimate. RPO was between $20.9 billion and $21 billion; this is above the consensus estimate of $20.25 billion. Palo Alto raised its full-year outlook as follows: Total revenue is now expected to be in the range of $11.415 billion to $11.425 billion, from the previous range of $11.28 billion to $11.31 billion. Non-GAAP earnings per share (EPS) ranged from $3.77 to $3.79, compared to the previous range of $3.65 to $3.70. Next-generation security ARR increased to $8.9 billion to $8.95 billion from the previous range of $8.52 billion to $8.62 billion. RPO increased from $20.9 billion to $21 billion compared to the previous $20.2 billion to $20.3 billion. (Jim Cramer’s Charitable Trust is long PANW and CRWD. See here for a full list of stocks.) When you subscribe to the CNBC Investment Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation’s portfolio. 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