It's been a tough past year for the stock of Palo Alto Networks (PANW +1.45%), with the stock down more than 25% as of this writing. Meanwhile, the stock sank further following the announcement last week of its fiscal 2026 second-quarter (Q2) earnings results.
Let's delve into the cybersecurity company's latest report and prospects to see if the stock's recent weakness is a buying opportunity.
Image source: Getty Images.
On an acquisition spree
As Palo Alto has embarked on its platformization strategy (selling its solutions as one of three cybersecurity platforms instead of as point solutions), the company has become aggressive on the acquisition front to add new cybersecurity solutions. In January, it closed its acquisition of real-time data monitoring company Chronosphere, while earlier this month, it completed its acquisition of privileged access company CyberArk. Meanwhile, along with its earnings report, it also announced that it will acquire Koi, which provides agentic artificial intelligence (AI) enterprise endpoint security solutions.
While these deals strengthen Palo Alto's positioning in the cybersecurity space and expand on its platformization strategy, they will also weigh on its earnings per share (EPS) in the near term. This is chiefly due to the stock component of the large CyberArk deal.
For Palo Alto's fiscal 2026 Q2, ended Jan. 31, revenue jumped 15% year over year to $2.59 billion, which was at the high end of its previous forecast for revenue of between $2.57 billion and $2.59 billion. Service revenue increased by 13% to $2.08 billion, with subscription revenue climbing by 14% and support revenue up 12%. Product revenue climbed by 22% to $514 million, led by growth in software firewalls.
Next-generation security once again powered Palo Alto's growth, with next-generation security annual recurring revenue (ARR) surging by 33%, or 28% excluding acquisitions, to $6.33 billion. Its largest next-generation security solution is SASE (secure access service edge), which saw its annual recurring revenue (ARR) soar about 40% to more than $1.5 billion.
Adjusted earnings per share (EPS) surged by 27% year over year to $1.03, which was ahead of its guidance of $0.93 to $0.95.
Looking ahead, Palo Alto updated its full-year guidance, taking its revenue up and EPS down, given its recent acquisitions. Below is a table of the company's fiscal Q3 and full-year forecast.
|
Metric |
Fiscal 2026 |
Prior |
Prior |
Current |
|---|---|---|---|---|
|
Revenue |
$2.941 billion to $2.945 billion |
$10.475 billion to $10.525 billion |
$10.5 billion to $10.54 billion |
$11.28 billion to $11.31 billion |
|
Revenue growth |
28% to 29% |
14% |
14% |
22% to 23% |
|
NGS ARR |
$7.94 billion to $7.96 billion |
$7 billion |
$7 billion |
$8.52 billion |
|
NGS ARR growth |
56% |
26% to 27% |
26% to 27% |
53% to 54% |
|
Adjusted EPS |
$0.78 to $0.80 |
$3.75 to $3.85 |
$3.80 to $3.90 |
$3.65 to $3.70 |
|
EPS growth |
-3% to 0% |
12% to 15% |
14% to 17% |
9% to 11% |
Data source: Palo Alto Networks. FY = full year. ARR = Annualized recurring revenue. NGS = Next-Gen Security.
Is the stock a buy?
The drop in stock price has taken Palo Alto to a much more attractive valuation than it has traded at in the past, with a forward price-to-sales ratio (P/S) of 9 times fiscal 2027 estimates and a forward price-to-earnings ratio (P/E) of 33 times 2027 estimates. While its recent acquisitions will initially cause some EPS pressure, these look like smart moves that will help with its platformization approach over the long term.
As such, I think investors can look to accumulate the stock at current levels on this dip.
