Palo Alto Networks Stock Drops Despite Strong Guidance -- Is This a Buying Opportunity?

Share prices of Palo Alto Networks (PANW 0.43%) slipped earlier this week after the company reported its fiscal Q3 earnings results. While the results were strong and topped analyst expectations, the company failed to raise the top end of its full-year fiscal 2025 guidance for the first time this year, and a few metrics only met its guidance. The stock is now up just 1.8% in 2025 and up almost 19% over the past year, as of this writing.

Let's take a closer look at the cybersecurity company's results and guidance to see if this could be a good opportunity to buy the stock on the dip.

Image source: Getty Images.

Platformization strategy continues to progress

The big story surrounding Palo Alto over the past 15 months has been the company's decision to shift directions and begin what it called a "platformization" strategy. With its customers seeing diminishing returns on their cybersecurity spending when they added new point solutions, the company decided to stop selling new point solutions and instead embark on a plan to begin moving its customers onto one of its three cybersecurity platforms.

However, to do this, it decided to give away some of its solutions for free while its customers had contracts in place for similar services with other vendors. It said this was the equivalent of giving away free product capabilities to customers for six months, and that it would negatively impact its billings and revenue growth over the next 12 to 18 months.

Palo Alto's platformization strategy continued to gain traction in fiscal Q3, with the company delivering "over 19 net new platformization deals." Over 19 seems to indicate 20, which is a nice round number, but nobody on the company's earnings call decided to ask management what over 19 actually meant. It ended the quarter with 1,250 platformizations within its top 5,000 customers. That's an increase from the 1,150 platforms it mentioned in fiscal Q1, showing its continued progress of transitioning existing customers over to one of its platforms.

Note that the company's three platforms are its network security platform Strata, threat detection and response solution Cortex, and its cloud security solution Prisma Cloud. Strata is its most widely adopted platform and the one that is typically the starting point for customers. Cortex and Prisma, meanwhile, are more upsells.

Its goal is to have between 2,500 and 3,500 platformization customers by fiscal year 2030. That would get it to around an annual recurring revenue run-rate of $15 billion.

Overall, Palo Alto's fiscal Q3 revenue rose 15% year over year to $2.29 billion, which was at the high end of the company's forecast for revenue of between $2.26 billion and $2.29 billion. Service revenue increased by 15%, with subscription revenue climbing 18% and support revenue rising 10%. Product revenue grew by 16%.

Its biggest revenue driver was once again next-generation security, and the company said it saw an inflection point in the quarter. Next-generation security annual recurring revenue (ARR) jumped 34% to $5.1 billion, led by a 200% surge in XSIAM ARR in the quarter. Palo Alto called XSIAM its "data to market engine." It's an AI-powered security platform that helps organizations detect, investigate, and automatically respond to cyberthreats faster and more efficiently than traditional legacy tools like SIEM.

SASE (secure access service edge), meanwhile, climbed 36%. SASE is a cloud-based cybersecurity solution that lets businesses securely connect users to apps and data from anywhere, combining networking and security into one service. It said that 40% of new SASE customers in the quarter were new to Palo Alto and that its overall SASE customer count grew by 22% to 6,000.

Remaining performance obligations (RPO), which is the revenue a company expects to generate from existing contracts, grew 19% to $13.5 billion, which was at the low end of its prior forecast. Current RPO rose 16% to $6.2 billion.

Adjusted earnings per share (EPS) jumped 21% to $0.80, which was ahead of its guidance of $0.76 to $0.77.

Looking ahead, Palo Alto forecasts fiscal third-quarter revenue to rise by 14% to 15%, to between $2.49 billion and $2.251 billion. It projects next-generation security ARR of between $5.52 billion and $5.57 billion, representing year-over-year growth of between 31% and 32%. RPO growth is expected to be between 19% and 20%, taking it to between $15.2 billion and $15.3 billion. It forecast adjusted EPS of between $0.87 and $0.89.

For the full year, the company bumped up the low end of its revenue guidance while raising its adjusted EPS guidance once again. Its forecast now calls for revenue of $9.17 billion to $9.19 billion and adjusted EPS of $3.26 to $3.28.

Below is a table of the company's guidance revisions.

Data source: Palo Alto Networks.

Should you buy Palo Alto stock on the dip?

Palo Alto's platformization strategy continues to progress nicely, as it adds both new customers and continues to transition existing customers to one of its main platforms, generally Strata. In addition, it is seeing strong momentum with both its Cortex and Prisma platforms as well. It said the number of customers on multiple platformizations grew nearly 70%, with Cortex customers tripling year over year.

That said, it was understandable why the stock sold off. Investors have come to expect Palo Alto to beat its results and raise its guidance. However, there were a few areas where it only met its forecast, and it only raised the low end of its full-year revenue forecast.

With the stock trading at a forward price-to-sales ratio (P/S) of 11.4 times fiscal 2026 estimates, investors have high expectations, and just meeting expectations can lead to the stock selling off when it reports earnings. Its valuation is a bit rich in my view, given its current growth, although we'll see if growth picks up next fiscal year. After all, the company expected its platformization strategy to negatively impact its billings and revenue growth over the next 12 to 18 months, and it will be reaching 18 months soon.

That said, the long-term story for Palo Alto remains intact, and the company should be a solid long-term investment.