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On Wednesday, Evercore ISI raised its price target for Palo Alto Networks (NASDAQ:PANW) stock from $215.00 to $220.00, while reaffirming its Outperform rating. Currently trading at $194.48, InvestingPro analysis suggests the stock is overvalued, despite its "GREAT" financial health score of 3.14. The adjustment follows Palo Alto Networks’ third fiscal quarter earnings, which presented a mixed performance against moderate expectations. The company’s platform strength and new product metrics were noted to be healthy, despite some inconsistencies in other areas.
Palo Alto Networks did not provide an official guide for fiscal year 2026 during their initial commentary. However, management later clarified that revenue from platformization deals is recognized on a straight-line basis, which could imply that current consensus estimates for FY26 might be overstating potential revenue spikes from these deals.
In regard to the broader economic environment, management reported minimal impact on their operations. With revenue growth of 13.86% in the last twelve months and a robust gross profit margin of 73.86%, the company has demonstrated resilience. April was termed an "anomalous" month with a brief slowdown, but the company indicated that trends have returned to normal, suggesting stability in the business. Management also suggested that, under typical conditions, certain financial metrics such as Remaining Performance Obligations (RPO) and Next-Generation Security (NGS) Annual Recurring Revenue (ARR) might have been slightly higher, while revenue, earnings per share (EPS), and cash flow would have been consistent. For deeper insights into PANW’s financial metrics and growth potential, InvestingPro subscribers can access 15+ additional ProTips and comprehensive analysis in our Pro Research Report.
The flat sequential growth in subscription and support revenue, contrasted with a 34% year-over-year increase in NGS ARR, was attributed to the third fiscal quarter having three fewer days. Questions about why platformization isn’t fully reflected in ARR were addressed, noting that while platform deals grew approximately 34% year-over-year, the increase in larger platform deals has not yet completely compensated for the decline in advanced subscriptions.
Management reiterated their fiscal year 2026 and 2027 free cash flow (FCF) margin targets of over 37%, aiming to counter the bearish narrative concerning potential FCF margin compression. The company’s current free cash flow yield stands at 2%, with analyst consensus maintaining a bullish outlook and price targets ranging from $123 to $235. This concern was previously considered due to the transition to deferred payment terms. The report also touched on the billing figures, which fell below consensus, explaining that the reduction in Palo Alto Networks Financing (PAN-FS) deals, which are recognized upfront, created a headwind for billings, while not affecting FCF.
In other recent news, Palo Alto Networks reported third-quarter earnings with revenue reaching $2.29 billion, marking a 15% increase from the previous year and slightly exceeding Wall Street’s forecasts. The company also posted non-GAAP earnings per share of $0.80, surpassing the consensus estimate of $0.77. The annual recurring revenue for next-generation security products rose to $5.09 billion, representing a significant 34% year-over-year growth. Analysts from Jefferies maintained a Buy rating, citing the company’s robust pipeline and projected free cash flow of $4.5 billion by fiscal year 2027. Meanwhile, Guggenheim reiterated a Sell rating, pointing to a consistent decline in total new annual recurring revenue for the seventh consecutive quarter. JPMorgan adjusted its price target slightly to $221, maintaining an Overweight rating, and highlighted the company’s positive operating profitability and AI security investments. BTIG kept a Neutral rating, noting slight revenue forecast adjustments and emphasizing growth in Prisma SASE and XSIAM. JMP Securities sustained a Market Outperform rating, reflecting confidence in Palo Alto Networks’ ability to exceed expectations and grow key financial metrics.
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