Why Palo Alto Networks Stock Jumped 15% In August Before Falling This Week

Shares of Palo Alto Networks (NASDAQ: PANW) surged 15% in August, according to data from S&P Global Market Intelligence. Cybersecurity stocks have seen booming investor demand due to the growing need for these services in the age of artificial intelligence (AI). Palo Alto Networks has seen its share price rise 320% in the last five years alone.

However, the stock has fallen over 10% this week, giving up most of its August gains, after reporting its Q4 earnings for fiscal year 2026. Here's why it rose in August and whether now is a good time to scoop up some shares.

Surging demand

Cybersecurity is becoming increasingly important for enterprises and other large organization seeking to secure data due to the threat posed by automated AI bots. Hackers using AI are becoming increasingly capable, meaning enterprises need to stay extra secure with their digital data.

This is where Palo Alto Networks steps in. It is one of the leading cybersecurity firms, providing solutions including automated firewalls, cloud security, threat detection, and threat intelligence. Last quarter, annual recurring revenue (ARR) for its next-generation solutions reached $9.1 billion, up 63% year-over-year, driven by contracts to protect from AI. Remaining performance obligations grew 34% to $21.2 billion.

Momentum into the quarter drove Palo Alto Networks' stock to a record high. Where it faltered this week was guidance for fiscal year 2027, which calls for total revenue growth of 23%-24%. Investors were likely hoping for more growth given the intense expectations surrounding the AI narrative.

Image source: Getty Images.

Should you buy Palo Alto Networks stock?

Despite giving up these August gains, Palo Alto Networks stock has still been a huge winner in the last few years, and it trades at a premium valuation.

On a price-to-sales ratio (P/S), it trades at a valuation of 22. That is significantly higher than the S&P 500 Index average of 3.8, which is also at a record high. Expectations could not be higher for Palo Alto Networks.

It generates a healthy amount of free cash flow, but this is clouded by its heavy reliance on stock-based compensation, with shares outstanding up 48% over the last 10 years. In order to be a buyer of Palo Alto Networks stock today, you need to believe in two things. First, that revenue growth will stay above 20% for many years in the future. Second, that its GAAP (generally accepted accounting principles) operating margin will expand significantly from here.

If you don't believe these things, the stock is likely not a good bet at a P/S ratio of 22.

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