Shares of Palo Alto Networks (PANW +1.55%) had a rough week, falling as much as 11.3%, according to data supplied by S&P Global Market Intelligence. As of 1:11 p.m. ET on Thursday, the stock was still down 9.9%.
The catalyst that sent the cybersecurity specialist lower was the fallout from its earnings report and management's associated guidance.
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Good isn't good enough
By all accounts, Palo Alto Networks' fiscal 2026 second quarter results came in ahead of Wall Street's forecast, as detailed yesterday by my colleague Keith Noonan -- so I won't rehash the quarterly report. However, management's Q3 forecast fell well short of investor expectations, and the fallout was swift and severe. At least 11 Wall Street analysts have reduced their price targets on the stock (as of this writing).
One representative take came courtesy of BMO Capital analyst Keith Bachman, who lowered his price target to $200, down from $230, while maintaining an outperform (buy) rating on the shares. The analyst pointed to the "uncertainty surrounding the broader software segment," but suggested that, given Palo Alto's comprehensive product portfolio, the company will likely deliver double-digit year-over-year organic growth for the foreseeable future.
Fear that artificial intelligence (AI) will dent the future prospects of many software providers has been rampant in recent weeks. However, I believe those fears are overblown, especially regarding cybersecurity, which is generally more resilient than other software offerings. Most enterprises view cybersecurity systems as mission-critical, and the advent of AI hasn't changed that. If anything, securing data and systems has become more crucial than ever.
Even after its decline, Palo Alto Networks sports a premium valuation, selling for 36 times next year's expected earnings. Considering its long track record of growth, I would suggest it is deserving of a premium, and the stock is a buy.
