Palo Alto Shares Jump on Strong Outlook. Can the Momentum in the Stock Continue?

Key Points

• Palo Alto shares rose as the company reported solid results and issued upbeat guidance.

• The company's platformization strategy continues to progress, and its addition of CyberArk will add another layer.

• However, the stock's valuation is getting pricey given its growth outlook.

• 10 stocks we like better than Palo Alto Networks ›

Share prices of Palo Alto Networks (NASDAQ: PANW) rose earlier this week after the cybersecurity company reported solid fiscal fourth-quarter results and issued upbeat guidance. However, the stock remains largely stuck in neutral, up a bit more than 1% in 2025, as of this writing.

Let's dive into the company's results and forecast to see if this could be the start of a longer-lasting rally.

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Image source: Getty Images.

Platformization gaining steam

It's been about a year and a half since Palo Alto implemented its so-called "platformization" strategy. At the time, it said it was seeing customer fatigue, as clients began to see diminishing returns from adding new cybersecurity point solutions. As a result, it decided to stop selling point solutions and move its customers onto one of its three cybersecurity platforms, the most common of which is its network security platform Strata.

However, in order to entice customers who had contracts in place for similar services, it decided to give away any duplicate solutions for free until these contracts expired. It is akin to a wireless company offering to buy out your remaining contract with a rival service to win your business. At the time, Palo Alto said this move could impact its revenue and billings growth for up to 18 months, so the impact of this should now mostly be in the rearview mirror.

In fiscal Q4, ended July 31, the company said it saw a record number of platformizations and that the strategy is leading to bigger deals. It ended the quarter with 1,400 platformization customers, an increase from 1,250 in fiscal Q3 and 900 a year ago. Its goal continues to be between 2,500 and 3,500 platformization customers by fiscal year 2030, which would get it to an annual recurring revenue (ARR) run rate of around $15 billion.

Overall, Palo Alto's fiscal Q4 revenue climbed 16% year over year to $2.54 billion, which was above the high end of the company's forecast for revenue of between $2.49 billion and $2.51 billion. Service revenue rose by 15%, with subscription revenue increasing 17% and support revenue up 11%. Product revenue jumped by 16%.

Next-generation security continues to be the company's biggest growth driver, with next-generation security ARR climbing 32% to $5.58 billion. Artificial intelligence ARR, meanwhile, soared by 2.5 times to $545 million.

The combined ARR of its threat detection and response platform, Cortex, and its cloud security platform, Prisma, increased by nearly 25% in the quarter. SASE (secure access service edge) ARR, which is part of Prisma, climbed 35%. SASE is a cloud-based cybersecurity solution that combines networking and security into one service. It noted that the importance of web browsers was picking up and that, as a result, it was seeing strong growth for its Prisma Access Browser.

Remaining performance obligations (RPO), which are the revenue a company expects to generate from existing contracts, jumped 24% year over year to $15.8 billion, which was above its $15.2 billion to $1.3 billion forecast.

Adjusted earnings per share (EPS) increased by 27% year over year to $0.95, which was ahead of its guidance of $0.87 to $0.89.

Palo Alto also issued a robust forecast that was ahead of analyst projections. Below is a table of the company's guidance.

Data source: Palo Alto Networks.

Is Palo Alto stock a buy?

Palo Alto's platformization strategy continues to progress, and it will look to incorporate its impending acquisition of CyberArk (NASDAQ: CYBR) into the fold. CyberArk specializes in identity security and privileged access management. While the market appeared not to like the deal, sending Palo Alto's shares lower at the time of the acquisition announcement, the company thinks the identity security industry suffers by not being part of a broader platform and that it will be able to better sell the solution as part of its platform. That makes a lot of sense, in my view.

Turning to valuation, the stock trades at a forward price-to-sales ratio (P/S) of 11.7 times fiscal 2026 estimates. For a company forecasting mid-teens revenue growth, that seems like a very high valuation. I also expected to see revenue growth start to pick up more with its platformization strategy no longer expected to negatively impact it in fiscal 2026.

As such, I wouldn't be a buyer of the stock at current levels despite the fact that I think the company is operating well. The valuation is just currently too high, which could lead to the stock being stuck in the mud for a while.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.