Palo Alto Networks shares fell Tuesday evening despite reporting better-than-expected earnings and revenue for its April quarter. We’ve seen the stock drop on earnings reports before due to lofty investor expectations, before ultimately recovering. This time may not be any different. Revenue in the cybersecurity company’s fiscal 2025 third quarter increased 15% year over year to $2.29 billion, exceeding the Wall Street consensus estimate of $2.28 billion, according to LSEG. Adjusted earnings per share (EPS) increased 21% to 80 cents in the quarter, ahead of the 77-cent LSEG consensus estimate. PANW YTD mountain Palo Alto’s year-to-date stock performance. Bottom line Palo Alto Networks has reached an inflection point in customer adoption for the security products that are critical to its future growth in the cloud-computing and artificial intelligence eras, according to CEO Nikesh Arora. The company refers to those products as its next-generation security suite â and they include its artificial intelligence-powered Cortex XSIAM, Prisma SASE, and software firewalls solutions. On Tuesday night, Palo Alto said its annual recurring revenue (ARR) for its next-gen security products reached $5 billion. The company was particularly upbeat about Cortex XSIAM, which has become its fastest growing product in history and a “game changer” for both the industry and company, according to Arora. Last month, the company unveiled Cortex XSIAM 3.0, the latest version of its industry-leading security operations platform. Palo Alto Networks has several big trends going its way â consolidation, the elevated threat environment, bad actors becoming more sophisticated, data proliferation, and artificial intelligence. And the company’s solid results despite a trade war and the uncertain macroenvironment were added proof that cybersecurity remains the most resilient spending category in software â a point that Arora made in talking with Jim Cramer on “Mad Money” Tuesday night. “This was a tough quarter to execute in April, as you could imagine,” Arora told Jim. “We had all this tariff discussions. Customers starting to get nervous. Thankfully, all that was behind us, but there were a few weeks of uncertainty in the market, which we all had to power through.” As we’ve said before, cybersecurity is the last area that a business should scale back spending on. Underinvesting could leave a corporation vulnerable to an attack. It is why we also like and own another best-of-breed cybersecurity company in CrowdStrike . Palo Alto Networks Why we own it: We believe cybersecurity is a secular growth market as bad actors are relentless and companies simply cannot afford to not invest in defense. It is a never-ending arms race. We believe Palo Alto Networks, in particular, is uniquely positioned to win due to its best-in-class tools and a broad product portfolio that allows it to provide an all-encompassing “platform” solution to cybersecurity. Competitors : CrowdStrike (also a Club stock), Fortinet , Cisco Systems Last buy : Aug. 2, 2024 Initiation : Feb. 15, 2023 However, Palo Alto Networks shares are down nearly 4% in extended trading Tuesday, possibly because the company did not raise its full-year outlook for a couple of key metrics. Namely, the company’s remaining performance obligation (RPO) in its fiscal third quarter increased 19% year over year to $13.5 billion. But this was the low end of management’s outlook range and slightly below the consensus of $13.541 billion. The full-year outlook was left unchanged. Also, its next-gen security ARR increased 34% year over year to $5.09 billion, slightly exceeding the FactSet consensus estimate of $5.06 billion and the high end of prior guidance. But the full-year outlook was left unchanged. Technology stocks that trade at high price-to-earnings multiples typically need beat and raises to trade higher post-earnings, and we didn’t see that with Palo Alto on Tuesday night. Still, we don’t think the quarter raises any long-term or fundamental concerns, which is why we are reiterating our $225 price target and hold-equivalent 2 rating . Quarterly commentary The main theme we’ve been talking about with Palo Alto Networks for more than a year is “platformization.” This strategy is all about getting customers to buy entire suites of products and consolidate their cybersecurity spending with Palo Alto Networks. The old way of doing things was buying individual products from different vendors. The goal behind this was to get customers to use more of its products and services â leading to more market share, bigger deals and higher annual recurring revenue per customer. Palo Alto also believes it drives better security outcomes. On this point, there was momentum in platformization wins during the February-to-April quarter. The company delivered 90 net new platform clients in the quarter, bringing the total platformization count to 1,250 within its top 5,000 customers. That’s up from 900 one year ago and keeps them on track to reach 2,500 to 3,500 total platformizations by fiscal year 2030. The number of customers with multiple platformizations increased nearly 60% in the third quarter. Cortex is an important driver of that growth, with the number of customizers on the Cortex platform up nearly three times versus a year ago. We’re encouraged by how the company is seeing strong growth from its largest customers. It had 130 customers with over $5 million in next-gen security ARR in the third quarter, up more than 40% year over year. It had 44 customers with over $10 million in next-gen security ARR, up over 60%. One of the big wins in the quarter was a $90 million deal with a leading global consulting firm. The customer platformized on Cortex through XSIAM. Another big transaction was a $46 million deal with a U.S. financial services firm. A third big win was a $33 million deal with another U.S. financial services firm. In each of those three deals, Palo Alto consolidated four products for its customers. As for AI, Arora believes its integration into businesses creates a critical need for additional cybersecurity since data, models, and infrastructure all need to be protected. He also thinks the estimated hundreds of billions of dollars spent on AI infrastructure over the next year creates another reason for customers to consolidate on a single platform. “This is precisely why our industry must change the paradigm, shifting away from today’s fragmented security landscape and towards consolidation,” Arora said on Tuesday’s conference call. “The cost of fragmentation is friction. Friction causes latency. Latency is the enemy of real-time cybersecurity. Now more than ever, bringing data together into a unified platform is critical.” Guidance For Palo Alto’s ongoing fiscal 2025 fourth quarter, here’s what the company expects (all estimates are sourced from FactSet): Total revenue of $2.49 billion to $2.51 billion, which is in line with the $2.50 billion consensus estimate. Non-GAAP earnings per share (EPS) in the range of $0.87 to $0.89, which at the midpoint of $$0.88 exceeds the $0.87 consensus estimate. Remaining performance obligation (RPO) of $15.2 billion to $15.3 billion, which is in line with the consensus estimate of $15.25 billion. Next-gen security ARR of $5.52 billion to $5.57 billion, which is roughly in line with the $5.55 billion consensus estimate. For the full-year fiscal 2025, management raised the low end of its revenue and adjusted free cash flow margin guidance ranges. The company’s adjusted EPS outlook was increased to the range of $3.26 to $3.28 from $3.18 to $3.24. As mentioned, next-gen security ARR and RPO were unchanged. (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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Nikesh Arora, CEO of Palo Alto Networks, looks on after attending the closing bell at the Nasdaq Market in New York City, U.S., March 25, 2025.
Jeenah Moon | Reuters
Palo Alto Networks shares fell Tuesday evening despite reporting better-than-expected earnings and revenue for its April quarter. We’ve seen the stock drop on earnings reports before due to lofty investor expectations, before ultimately recovering. This time may not be any different.
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