Palo Alto Networks reported a strong quarterly beat-and-raise on Tuesday night, ending persistent doubts that artificial intelligence will cause disruption. The stock was volatile in after-hours trading, but given the torrid rise in earnings, it’s not surprising to see this kind of reaction. The company’s third-quarter fiscal 2026 revenue rose 31% year over year to $3 billion, beating Wall Street’s consensus estimate of $2.94 billion, according to LSEG. Adjusted earnings per share (EPS) for the quarter rose 6% to 85 cents, beating the LSEG consensus estimate of 80 cents. Shares were mostly flat, but volatile in after-hours trading. Pal Alto is up about 61% for the year and 85% since the end of March. Why We Own It Cybersecurity is a long-term growth market, the bad guys are relentless, and businesses can’t afford not to invest in their defense. It’s a never-ending arms race, one that’s becoming even more important with the proliferation of artificial intelligence. Palo Alto Networks has best-in-class tools and a broad product portfolio that allows us to provide a comprehensive “platform” solution for cybersecurity. Competitors: CrowdStrike (also a club stock), Fortinet, Cisco Systems Last Purchased: November 24, 2025 Started: February 15, 2023 Conclusion Earlier this year, large language models created by the likes of Anthropic offered cybersecurity solutions for everyone, and established security companies like Palo Alto Networks We fought this when our stock price crashed due to fears of being replaced by vendors. This is a theory we never accepted, but we admit that it tested our patience. How did emotions change so quickly? The company’s opportunistic buybacks, including increasing its share buyback authorization by $1 billion in February, haven’t helped the stock price. The company briefly made headlines when it was revealed that CEO Nikesh Arora had purchased $10 million worth of stock in late March, when the stock was trading in the $140 range. But we weren’t off to the races yet. What finally got the market on its side was the launch of Project Glasswing. This is an initiative established in early April by Anthropic and several key partners to address the increased risks associated with users of its most advanced Frontier model, the Claude Mythos. Yes, this is the same human race that was once seen as the boogeyman. The creation of models like Mythos was a “game changer” for the industry, as management explained in the earnings presentation. “We have entered the era of true cyber-enabled systems. Models like Mythos have the autonomous capability to execute comprehensive attack campaigns from start to finish. This represents a fundamental paradigm shift for the cybersecurity industry,” Arora explained on the earnings call. The company said it has held more than 800 customer meetings in the past six weeks to help customers grapple with the future of cybersecurity in a post-Mythos world, with many of those meetings leading to interest in its Cortex and Agentic endpoint security platforms. For context, Arora told Jim Cramer on “Mad Money” that Palo Alto held 1,200 customer meetings in all of last year. Rapid advances in AI like the Mythos model could have “increased the bottom line value of the entire cybersecurity industry,” Arora said. Terminal value is essentially the “forever” value of a business that extends beyond any reasonable revenue projection period. That’s definitely encouraging. But we need to see strong execution, including companies executing product roadmaps and consolidating deals. Last quarter, the commentary on Palo Alto Networks was that the company’s transactions were excessively dilutive to earnings. Now, management has demonstrated that these transactions have expanded the overall addressable market. We were pleased to see that the company showed significantly ahead of plan one quarter after completing its well-timed acquisition of CyberArk. Palo Alto Networks’ $25 billion acquisition of the identity security leader, announced in late July, was a pivotal move that solidified the company’s position in securing AI agents that can operate autonomously and complete tasks on behalf of human users. CyberArk’s annual recurring revenue is up 27% year-over-year, and management believes synergy targets are 3-6 months ahead of schedule. This keeps the company on track to achieve a 40% free cash flow margin in FY2028. Although Chronosphere was a small trade, it was still one of the most important in gaining exposure to the observability market, which becomes important as the amount of data companies need to see and protect increases. In validating this strategic move, management reiterated that two of the top five frontier labs are using this product. The acquisition was announced in November and completed in January. The bottom line is that if you want to be selected as an AI stock, you have to prove that AI is accelerating your business. Palo Alto did just that, reporting accelerating organic booking growth and demonstrating why its recent acquisitions are becoming increasingly important in the AI era. Total remaining performance obligations (RPO) increased 36% year over year and 22% excluding CyberArk and Chronosphere. RPO represents business that has been signed but not yet converted into revenue. Meanwhile, Next Generation Security’s annual recurring revenue (ARR) increased by 60% year-over-year, and by 28% excluding two transactions. The business momentum here is clear and justifies the stock’s strong performance over the past 4-5 weeks. The stock may be trading sideways in after-hours trading, but it’s just going on a parabolic curve, creating high expectations. We are considering whether to change our rating, but we are raising our price target from $255 to $325. Commentary The vendor consolidation trend known as “platforming” is still alive and well in Palo Alto. Palo Alto Networks added approximately 110 net new platformings during the quarter. 20 of those are due to identity and observability, think CyberArk and Chronosphere. This brings the total platform trades to approximately 1,650, with an additional 630 trades from identity and observability. Given the current situation, management said it is confident that next-generation ARR will exceed 4,000 platforms at $20 billion by fiscal year 2030. One of the big deals this quarter was a $200M+ ARR expansion deal with leading observability company Frontier AI Labs. Another important win was an $80 million contract with a major U.S. power company that was critical to building an AI data center. The company increased spending on next-generation firewalls and selected Secure Access Service Edge (SASE) for more than 25,000 employees. The third win was a $40 million contract with a global communications provider to purchase Extended Security Intelligence and Automation Management (XSIAM) for AI modernization of its security operations center. We’ve also integrated multiple point products. The fourth high-profile deal was a more than $20 million transaction with a leading global consulting firm that selected an AI security platform known as Prisma AIRS to protect its AI apps and agents. By product, Palo Alto’s network security business had one of its strongest quarters in recent memory, with firewall bookings up 19% year-over-year and SASE ARR up 40% year-over-year. Another highlight is Prisma AIRS. It became the fastest growing product in the company’s history, thanks to over 300 customers signing up. That’s three times the number of customers it had a quarter ago. Palo Alto announced Prisma AIRS in late April 2025. Guidance The company’s outlook for the fourth quarter of fiscal 2026 exceeded FactSet’s expectations across all lines. Revenue was in the range of $3.345 billion to $3.355 billion, beating the consensus estimate of $3.282 billion. Adjusted EPS ranged from 96 cents to 98 cents, with the midpoint of 97 cents above the consensus estimate of 94 cents. Next Generation Security’s ARR was $8.9 billion to $8.95 billion, well above the consensus estimate of $8.57 billion. RPO was $20.9 billion to $21 billion, higher than the consensus estimate of $20.25 billion. Palo Alto has raised its full-year outlook as follows. Total revenue is expected to be in the range of $11.415 billion to $11.425 billion, up from the previous range of $11.28 billion to $11.31 billion. Non-GAAP earnings per share (EPS) ranged from $3.77 to $3.79, an increase from the prior range of $3.65 to $3.70. Next Generation Security’s ARR was $8.9 billion to $8.95 billion, up from $8.52 billion to $8.62 billion. RPO was $20.9 billion to $21 billion, an increase from the previous range of $20.2 billion to $20.3 billion. (Jim Cramer’s Charitable Trust is long PANW and CRWD. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. 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