Palo Alto Networks on Tuesday evening delivered a strong quarter. But in a market with no room for error, the cybersecurity giant stumbled on guidance, and the stock sank. Revenue for the company’s fiscal 2026 second quarter ended Jan. 31 increased 15% to $2.59 billion, outpacing the $2.58 billion consensus estimate compiled by data provider LSEG. Earnings per share (EPS) jumped 27% year over year to $1.03, beating the LSEG estimate of 94 cents. PANW YTD mountain Palo Alto Networks YTD Shares of Palo Alto Networks dropped more than 8% in after-hours trading following a weaker than expected current quarter EPS forecast and a cut to its full-year earnings outlook. The glass-half-full view, however, is that management raised its guidance on current quarter and full-year revenue and next-generation security annual recurring revenue (ARR). That indicates to us that the downward revision to profitability is the result of share count dilution, resulting from the CyberArk and Chronosphere acquisitions, rather than anything relating to the fundamentals. Bottom line With noise around management’s guidance, especially given what the stock has been through over the past month in the software-as-a-service (SaaS) armageddon, investors are better served focusing on the qualitative commentary from the post-earnings conference call and the quarterly release regarding the impact of artificial intelligence on Palo Alto’s business. Through this lens, we feel a whole lot better about the year ahead and the opportunity Palo Alto stock has to offer than the after-hours slide and the year-to-date difficulty might have you believe. Additionally, Jim Cramer has said repeatedly that cybersecurity stocks, including Club names Palo Alto and CrowdStrike, should never have been lumped in with more traditional SaaS names in the first place. That’s because of how important cyber protection is in a world where both the good guys and the bad guys have AI in their arsenals. We bought some more CrowdStrike earlier this month. Why we own it Cybersecurity is a secular growth market , as bad actors are relentless and companies cannot afford not invest in defense. It is a never-ending arms race, especially in the age of AI. We believe Palo Alto Networks, in particular, is uniquely positioned to win, with its all-encompassing platform solution to cybersecurity. Competitors : CrowdStrike (also a Club stock), Fortinet , Cisco Systems Last buy : Nov. 24, 2025 Initiation : Feb. 15, 2023 On the call, Palo Alto CEO Nikesh Arora said that AI adoption is resulting in an expanded attack surface for organizations, with more virtual agents, “more infrastructure, more machine-to-machine activity, and new classes of risks that simply did not exist before.” Arora emphasized that a comprehensive platform approach to cybersecurity is not only important but, in fact, the enabler that allows AI adoption to happen “safely and at scale.” He added, “As AI begins interacting autonomously across application infrastructure, fragmented security introduces delay at precisely the wrong moment.” During the Q & A, Arora said the speed of AI means that companies with multiple security vendors won’t be able to respond to threats quickly enough. Customers have figured this out, he added, noting increased demand for the type of platform strategy offered by Palo Alto. Comparing the current adoption curve of AI-security to cloud-security a decade ago, Arora said it’s all happening a lot faster this time around. More control in the hands of AI agents requires more cybersecurity adoption, according to the CEO. That’s a view we certainly agree with. Another important aspect to consider the next time someone says that Anthropic’s Claude is going to displace an entire security platform is the dynamic between bad actors and those that keep them out. As Arora rightfully reminded investors on the call, hackers can attack a million times, and they only need to get it right once to wreak havoc. Palo Alto must be right and defend its clients’ systems 100% of the time. So, while large language models (LLMs) may get it right even 95% of the time, they aren’t a threat to cybersecurity delivery companies like Palo Alto until they hit closer to 99.9% accuracy, the CEO noted. That 4.9% is everything. Remember, the capability of an LLM is the result of its training data. The thing about cyber, though, is that as attack surfaces expand and AI adoption increases, it’s not the old threats that companies need to worry about. It’s the new threats, the ones that have never shown up in training data, that security experts need to be concerned with. To this point, Arora said, “In most cases, our security products sit at edges and create new data and logs that didn’t exist, from everything that’s around them. So, to the extent we are creating proprietary data and security, that is not going to be replaced by an LLM. We’re not a system of record. We’re not a system of work. We are generating specific domain-specific data based on threats we see out in the environment and then using that analytically to figure out how the customer should protect themselves.” While one analyst on the call did ask why the increased demand isn’t yet showing up in the numbers in a big way, Arora was quick to say that, similar to what was seen with cloud adoption, there is a lag. “Even then, it was literally a two-year cycle or three-year cycle before enterprises fully got all their applications and workloads moved onto the cloud.” The CEO does fully expect the numbers to start showing up. One way to see this is through the adoption of Prisma AIRS, Palo Alto’s AI-native security platform, which was called out in the company’s slide deck as being “one of the fastest growing products in company history,” with over 100 customers, a more than three times sequential increase. By the way, despite the destruction in Palo Alto stock, shares are up about 400% since mid-2018, when cloud-adoption was getting into full swing. Patience was rewarded then, and we believe it will be again this time around in the AI revolution. Given what we heard Tuesday evening from management, we’re reiterating our buy-equivalent 1 rating on Palo Alto stock. We are, however, lowering our price target to $200 percent, in acknowledgement of the contracted multiples investors are putting on anything that’s software related. Quarterly commentary While the longer-term impact of AI on cybersecurity is what will ultimately drive how investors view the company, there is no denying the momentum in the business. Palo Alto’s next-gen ARR, which measures the annualized allocated revenue of all active contracts, and the company’s total remaining performance obligation (RPO), which represents business signed but not yet fulfilled, both came in ahead of expectations. Next-gen ARR reaccelerated in fiscal Q2 to 33%, up from the 29% growth rate in the prior quarter. There were some misses elsewhere, but we’re nonetheless encouraged by the year-over-year growth pretty much across the board and the strong operating margin expansion realized. On gross margin, the team cited some impact on the product side due to memory and storage prices, but added that the company is well-positioned to manage through this headwind. Not shown in the earnings table, it’s also notable that Palo Alto managed to sign up about 110 net new platformizations in the second quarter, representing about 35% year on year growth. The net retention rate (NRR) among platformized customers came in at 119%. Palo Alto defines NRR as the “percentage of NGS [next-gen] ARR retained as of the end of Q2’26 from platformized customers as of the end of Q2’25, excluding any impact from Chronosphere.” In other words, that same cohort of customers is generating 19% more NGS ARR than it did a year ago. Low churn helped, but it’s more about doing more business with existing customers than what was lost to attrition. Guidance We are providing management’s guidance for the current quarter and full year. However, we are foregoing the inclusion of Street expectations as we do not believe the consensus estimates reflect the impact of the CyberArk or Chronosphere deals. For its fiscal 2026 third quarter, the team expects to deliver: Next-generation ARR of $7.94 billion to $7.96 billion Remaining performance obligation to be between $17.85 billlion and $17.95 billion Revenue in the range of $2.941 billion to $2.945 billion Adjusted earnings of 78 cents to 80 cents per share Guidance for full-year 2026: Next-generation ARR of $8.52 billion to $8.62 billion RPO to be between $20.2 billion and $20.3 billion Revenue in the range of $11.28 billion to $11.31 billion, up from the prior $10.5 billion to $10.54 billion range Adjusted EPS of $3.65 to $3.70, down from the prior range of $3.80 to $3.90 (Jim Cramer’s Charitable Trust is long PANW, CRWD. 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. 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https://www.cnbc.com/2026/02/17/we-cut-our-palo-alto-price-target-but-view-the-post-earnings-drop-as-an-opportunity.html
