Skip NavigationMarketsBusinessInvestingTechPoliticsVideoWatchlistInvesting Club
PRO
LivestreamMenuShares of Palo Alto Networks are down over 4% Wednesday, despite the cybersecurity provider delivering strong quarterly results the prior evening. This next-day move may seem a bit odd, given the company not only exceeded expectations for the reported quarter, but also issued guidance ahead of expectations for the current three-month period. So, what is the culprit? It may have to do with Palo Alto’s longer-term outlook, coupled with the fact shares were scorching hot into the print — a setup that always raises the bar and increases the odds of a post-earnings pullback. On Tuesday night, Palo Alto did raise its outlook for hardware growth over the next few quarters — think firewall boxes installed at data centers, enterprise campuses and industrial environments. However, on the earnings call, the management team simply reiterated its guidance for fiscal 2030 next-generation security annual recurring revenue (NGS ARR) — a collection of businesses focused on subscriptions for its cloud-native services, and excluding hardware and legacy products. This metric is benefiting from Palo Alto’s “platformization” push, with customers committing to use multiple types of products. Cyber is a historically fragmented industry, and the company is trying to bring about consolidation. “Moving forward, we remain confident in surpassing 4,000 platformizations by fiscal 2030, providing the primary momentum towards our $20 billion target for NGS ARR,” CEO Nikesh Arora said. At the same time, during the question-and-answer session, Arora was asked about demand, and specifically what the team is seeing regarding AI-driven demand. As long-term investors, we generally liked what he had to say about an increase in the forever, or “terminal,” value of the business. However, it probably wasn’t music to the ears of the hot money, the short-term traders seeking out momentum names. They helped take this stock up about 86% in two months (and roughly 65% in the last month alone). It was a remarkable rally after the stock was lumped into the broader software-as-a-service, or SaaS, group and crushed on AI disruption fears. Here’s what Arora said on the call, according to the FactSet transcript: “Six months ago, cybersecurity stocks were doomed because AI was going to protect every one of us and we were all out of a job, right? And suddenly, we’re hiring more people. AI is not taking jobs away. And suddenly, you can’t execute a cyber protection scenario without using a platform cybersecurity vendor. … Understand that the big takeaway, if I was in your shoes [as an analyst], I would take from this is if you thought that the terminal value of cybersecurity was gone, like many SaaS companies, this terminal value is here to stay. You actually just created a longer-term G in your model for long-term growth rate for cybersecurity. I think, to the extent you felt that demand was going to get weak in Q4 or Q1 or Q2 for someone, it’s not going to get weak. Now, I wouldn’t get ahead of my skis and start throwing the kitchen sink at numbers for cybersecurity companies because there is still a process, a mechanism, a cycle that people buy in and there’s execution and deployment. So … do I see good demand? Yes. … Do I believe that this demand will continue for longer? Yes. … Do I expect a windfall next quarter, the following quarter? No. I expect robust growth.” That’s a lot to unpack, though we felt providing his extended answer was worthwhile. Let’s simplify his argument a bit. What he’s saying is that it was clearly wrong for cybersecurity stocks to have sold-off this year because AI is absolutely the growth driver we’ve longed argued it would be . Long-term shareholders got the validation they were looking for. But the hot money didn’t get the upward guidance revision they wanted to keep the momentum alive. In fact, Arora straight up told them it would be wrong to expect a massive earnings windfall or an incredible growth acceleration next quarter, which is what we saw from AI computing hardware players like Dell and HP Enterprise . Both server makers reported blowout quarters within the past week. Put another way, anyone thinking that they are going to sit on shares and walk into a quarter in which Palo Alto gave guidance some 30 percentage points ahead of estimates is mistaken. Consider: On Monday night, HP Enterprise issued current quarter earnings-per-share guidance of 90.5 cents at the midpoint, versus a 58-cent estimate, according to FactSet. The midpoint of Palo Alto’s EPS outlook was 97 cents, compared with the 94-cent consensus. So, where do we stand? To better understand that, we need to put the valuation in context. Below, we have a 10-year chart illustrating the forward earnings multiple for Palo Alto’s shares. The price-to-earnings ratio is calculated by dividing the stock price by the consensus 12-months earnings projections on FactSet. As we can see, shares went into the quarter at the highest valuation in at least a decade — in the ballpark of 75 times forward earnings. That’s acceptable if you think the earnings estimates are going to see a massive upward revision. However, it’s a bit harder to accept after the CEO tells us growth has ticked up, but we shouldn’t expect some earnings windfall because that’s simply not how the cybersecurity sales cycle works. Arora’s explanation certainly makes sense because Palo Alto needs a lot of things to happen before it can come in and secure all these new AI workloads — the chips and server racks need to be ordered, supplied, installed, configured and brought online. If you’re a short-term trader, though, that’s little comfort to you. Within the past year, specifically, Palo Alto shares were valued at about 56 times forward earnings in October 2025, when they were trading at what was then an all-time high. This was also right before the “AI is eating software” fears swept over the market. As that set in to start the year, Palo Alto’s P/E contracted all the way to 38 in late March, before ripping to the 70-plus levels seen before the print. Now, had Palo Alto turned in an EPS outlook that rivaled the hardware vendors, the stock would’ve likely reacted better because it would mean shares weren’t so expensive after all. The forward estimates used to calculate the P/E ratio would’ve been higher, making the stock look cheaper in hindsight . But Palo Alto didn’t do that, and as a result, investors are waking up to the idea that shares really have risen on the back of multiple expansion. To be sure, trading at 38 times forward earnings in late March was totally wrong. That’s been confirmed. However, the story is arguably only a bit better than what we thought when shares carried a P/E of 56, meaning that we’ve more than likely overshot to the upside, at least for now. That’s not to say we don’t like Palo Alto, or that we don’t think the stock is going higher – we certainly do, which is why we raised our price target Tuesday night. So did just about every firm on Wall Street. Shares are simply due for a breather, as the data center buildout progresses and earnings have a chance to catch up with the price action. In many ways, that’s perfectly fine and healthy. Stocks cannot go up in a straight line forever. This also means you don’t need to rush in and buy shares Wednesday, especially with cybersecurity peer CrowdStrike reporting after the closing bell . That’s another one headed into the report red hot, which we’ve long said we don’t like. Palo Alto is the latest example as to why. In general, Palo Alto is no stranger to post-earnings declines. Over the past four earnings reports, the stock has fallen the next day three times, including by 6.8% in February and 7.4% in November. But it has historically bounced back later on. On average, it’s taken 72 trading days for the stock to be up 10% from the close on its earnings date. This is why Jim Cramer said on Wednesday’s Morning Meeting he’s willing to wait a day before upgrading the stock to a 2 rating from our current 3 designation, which means sell into strength. The bottom line? When you think that when you’ve found a fantastic long-term story with a growing addressable market, which AI certainly does for cybersecurity, you look to manage the position by selling extreme moves, and rebuilding on pullbacks. (Jim Cramer’s Charitable Trust is long PAWNW. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.Read More
About The Author
