By Jacob Sonenshine
Palo Alto Networks shares have been caught up in the broader software selloff, creating an opportunity to buy a company that dominates a dynamic cybersecurity business and can withstand competitive threats.
The stock is down 18% since its record high in late October. The benchmark iShares Expanded Tech-Software Sector exchange-traded fund is down 28% from its peak.
The software industry's concerns are now well known. Anthropic's and OpenAI's leading AI tools will displace many business software providers. The concern has applied to cybersecurity software companies, including Palo Alto, which is confronting worries that Anthropic's Claude Mythos product can take market share.
The good news is there's plenty of evidence to suggest that Palo Alto will continue to grow robustly for years. Expect higher earnings over time to boost the stock. The shares trade at 46 times forward earnings estimates, down from 56 times just before the software slide. The stock deserves a premium versus the rest of U.S. software, currently averaging about 22 times, because analysts expect earnings to grow for a long time, with estimates going all the way out to at least 2031, according to FactSet.
If that growth trajectory looks bankable, and the stock trades at the multiple of forward earnings it reached before the selloff, it would hit $237 by the end of this year. That's a 31% gain from its current $181.54.
AI applications still have a way to go before they can outright displace existing cybersecurity products. Mythos isn't widely available for commercial purposes and requires partnership with the major cyber companies, including Palo Alto, which have the necessary infrastructure to fully and safely deploy the cyber technology. The case could therefore be made that, so far at least, Mythos is helping the business of cyber incumbents like Palo Alto.
"Cybersecurity is another level [of complexity] where I don't think anybody is going to make huge headway in the next year to year and a half," says Luke Rahbari, portfolio manager of the Rational Equity Armor fund, which owns the stock.
Palo Alto's sales continue to grow ahead of analyst estimates. Fiscal-year second-quarter sales of $2.59 billion increased 15% year over year, with the bulk of revenue coming from its subscription and support segment, beating estimates by $10 million. Companies around the globe continue to adopt cutting-edge cybersecurity software to thwart a growing number of threats.
"We see AI creating an elevated threat environment and gradual tailwinds to security budgets," writes BTIG analyst Gray Powell, who met with a number of private cyber company executives and favors Palo Alto over most other cyber names.
Adjusted earnings of $1.03 per share cleared expectations of 94 cents. Full-year sales guidance of $11.30 billion surpassed estimates for $10.5 billion.
The only blemish from the latest earnings report was that management guided for fiscal-2026 EPS of $3.68, at the midpoint of the range, compared with analysts' pre-earnings hopes for $3.86. That's because the operating margin outlook was about one percentage point below expectations.
That aside, it's hard to find any troubling fundamentals in the company's financials as it invests for a bright future of high demand. That demand will continue to materialize in coming quarters as Palo Alto successfully integrates its new acquisitions. This will give investors confidence that the assets do indeed add value.
It will also help margins. So, too, will cost savings from its recent acquisition of CyberArk Software, which management said would remove cost redundancies. Analysts forecast a percentage-point increase in 2027 as the effect of the initial cost increases from the acquisition fades next year.
Margins will also be helped by sales growth. With everything Palo Alto now owns, it provides companies with identity management products, which largely ensure internal user and employee identities, and privileged access.
This breadth of offerings helps the company pursue its "platformization strategy." The company is consolidating all offerings into three AI-driven platforms: Prisma Cloud, Cortex, and Strata. This structure helps Palo Alto approach customers with a suite of complementary products for each company's specific needs.
Palo Alto can upsell customers new products that are more efficient and can save them money, muscling out competition from the many niche cyber vendors. Dozens of companies, public and private, provide cyber products, and the several technology and cyber chiefs of various companies we spoke with all said they often choose major cyber vendors over lesser-known ones. They have firm relationships with large vendors because of the providers' track records and their more dynamic product sets.
"Palo fit very well into our architecture," says Anthony Caiafa, chief technology officer at SS&C Technologies, a Palo Alto client. "Palo was willing to work with us to say, 'How can we improve the products?' They were big enough, but they thought and moved like a smaller company."
The main risk is that Mythos ultimately grows its own wings and takes some of Palo Alto's customers. There's no evidence of that happening anytime soon, given how complex it is to solve cyber threats at large enterprises. There are more-established direct competitors like CrowdStrike that could take market share.
For now, there's reason for investors to trust that CEO Nikesh Arora can deliver continued growth. At the helm since June of 2018, Arora has overseen earnings growth resulting in stock gains that were more than double the S&P 500 index's rise, as he successfully shifted the company from a hardware cybersecurity maker to mostly a software provider.
Trust this stock. B
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(END) Dow Jones Newswires
May 01, 2026 21:30 ET (01:30 GMT)
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