By Jacob Sonenshine
Palo Alto Networks, a Barron's stock pick, dropped after earnings -- a rare occurrence recently. Investors should keep holding on to the name.
The cybersecurity software stock, which we recommended in late April on the basis that it would weather the artificial intelligence storm, dropped 5.6% Wednesday. It's still up 55% since we introduced it as a pick, compared with about 19% for the iShares Expanded Tech-Software Sector exchange-traded fund.
Tuesday evening's April quarter earnings sparkled, as sales of $3 billion and earnings 85 cents a share both surpassed analyst estimates. That couldn't offset a tough day for software stocks, broadly. The iShares Expanded Tech-Software Sector ETF was down 4.3% as investors took some profits after massive gains.
Palo Alto, too, is seeing some profit-taking. The stock gained 79% in the 30 trading days before the earnings, easily the largest gain in such a period since at least 2013, according to Jefferies trading analyst Jeff Favuzza.
True, the quarterly report contained some numbers that the market could "nit pick" at, as Favuzza puts it in his Wednesday note. Annual recurring revenue, or ARR, was $8.1 billion specifically for the next-generation security product, and $6.5 billion, excluding the impact of the newly-acquired Chronosphere and CyberArk. It narrowly missed what portfolio managers Favuzza spoke with were anticipating, he writes.
But perfection is hard to achieve -- and the overall results showed that the company is on track to grow durably.
It starts with organic annual recurring revenue: That metric, excluding ARR from the two new assets, rose 28% year over year. Organic revenue of $2.61 billion grew 14%, and revenue is accelerating. Chronosphere's ARR grew double-digits in percent terms quarter over quarter, management said on the earnings call. Also, "Psima AIRS," the company's new product that protects customers against threats to their AI property, saw its customer count triple from roughly 100 in the second quarter to about 300 now.
Management's sales guidance for the full year was $11.42 billion at the midpoint of the range, about 1% above what analysts had forecast before the release. While that's a slimmer beat than the quarterly revenue result, keep in mind the company's sales have averaged 5% above projections in the last 10 quarters, according to FactSet.
The whole picture can "prove our thesis that revenue growth is set to reset higher," writes BNP Paribas analyst Andrew DeGasperi.
Profit margins also look set to improve. Palo Alto said it's likely to achieve cost synergies (the ability to cut redundant costs) from the recent acquisitions a quarter or two earlier than previously expected. Guidance for full-year operating margins called for just over 29%, versus 27.1% in the April quarter. CEO Nikesh Arora even said a 40% free cash flow margin by 2028 is in play.
That's key. Analysts see $15.61 billion in fiscal 2028 sales, so the margin implies $6.24 billion of free cash flow, almost 50% above analysts' 2026 forecast.
That could drive the stock higher. Sure, its current multiple of free cash flow per share of about 51 times is near the high end of its range in the past five years. Ultimately, the company may deserve it if the AI story propels high growth for longer.
"We remain bullish on PANW's improving mix shift toward higher-growth recurring revenue," writes Mizuho's Gregg Moskowitz, who maintained his Outperform rating.
Enjoy the ride.
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Jacob Sonenshine is a stock picks writer at Barron's Investor Circle and regular contributor to The Trader Column. His general focus is technology, consumer, industrial, and healthcare.
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June 04, 2026 04:18 ET (08:18 GMT)
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