Whereas synthetic intelligence (AI) is among the largest disruptive applied sciences of this era, it additionally poses a problem to some established firms, together with cybersecurity companies and software program firms.
In brief, AI-powered packages are creating rapidly sufficient that they will maybe duplicate the actions of some software program, together with instruments that automate workflows or present analytics. For cybersecurity companies, it’s extra of a double-edged sword. AI may also help cybersecurity firms increase their attain by monitoring extra endpoints, however it could additionally eat into the underside line. Corporations can use AI to embed safety straight into their platforms, decreasing the necessity for cybersecurity firms like Palo Alto Networks (PANW).
That’s one of many the explanation why PANW inventory is down 19% within the final month alone. However CEO Nikesh Arora is attempting to cease the bleeding, telling analysts through the firm’s most up-to-date earnings name that AI isn’t a viable substitute for cybersecurity.
“I’m nonetheless confused why the market is treating AI as a risk to no less than cybersecurity,” Arora stated. “I can’t communicate for all of software program, however one factor we’re positively seeing is that prospects have found out that they should drive extra consistency of their safety stack to have the ability to reply quicker utilizing AI.”
Ought to traders be backing away from Palo Alto Networks now? Or is the latest weak point in PANW inventory and cybersecurity shares a golden alternative to purchase the dip?
Headquartered in Santa Clara, California, Palo Alto Networks supplies community safety merchandise to purchasers and authorities businesses around the globe. The corporate supplies an AI-powered community safety platform and provides next-generation firewalls, in addition to merchandise that help Digital Non-public Community (VPN) applied sciences, and intrusion detection and prevention.
Shares of PANW are down 25% within the final 12 months as a part of a sector-wide hunch that can be affecting firms like Zscaler (ZS) and Fortinet (FTNT). Palo Alto is badly underperforming the S&P 500 ($SPX), which is up 13% within the final 12 months.
Nonetheless, the drop can be making the inventory extra inexpensive proper now. PANW inventory at the moment has a ahead price-to-sales (P/S) ratio of 13.3 instances, which is simply above its five-year P/S imply of 12.1. The ahead price-to-earnings (P/E) ratio of 72 instances can be extra affordable in comparison with Palo Alto’s historic common.
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Traders could not notice that PANW inventory is struggling simply by wanting on the earnings report, as the corporate had robust outcomes for the fiscal second quarter of 2026 (the interval ending Jan. 31). Income was $2.6 billion, up 15% year-over-year (YOY). The corporate additionally noticed a 22% enchancment in its product income to $514 million, and 13% income progress for its subscription and help companies.
Internet earnings was $432 million, up 61% YOY. EPS got here in at $0.61, beating analysts’ expectations of $0.49.
“We noticed continued power in platformizations, a development that’s accelerating as a result of AI — prospects are eager to each modernize and normalize their cybersecurity stack, aligning them to our method,” stated Arora.
Palo Alto can be increasing, having introduced a $3.35 billion acquisition of Chronosphere, which operates an AI platform, and having finalized its $25 billion buy of the cybersecurity firm CyberArk. The corporate plans to include CyberArk’s identification safety platform into its safety suite.
Administration issued steerage for the third quarter to incorporate income of $2.941 billion to $2.945 billion, up about 28% from a 12 months in the past, and web earnings per share in a spread of $0.78 and $0.80.
Usually, analysts have lengthy been bullish on the cybersecurity firm. Of the 50 analysts with protection of PANW inventory, 35 give it a “Sturdy Purchase” ranking, three have a ”Average Purchase,” and 12 counsel a “Maintain” ranking. Analysts have a imply value goal of $209.40, which suggests 41% potential upside for the inventory.
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That could be altering, nevertheless. For example, BMO Capital analyst Keith Bachman not too long ago maintained an “Outperform” ranking on PANW inventory however lowered his value goal from $230 to $200. Bachman expects the corporate to ship YOY natural progress within the double-digits for the foreseeable future, however lowered his goal in mild of “uncertainty surrounding the broader software program section.”
With that in thoughts, it is sensible for Palo Alto’s CEO to attempt to shore up the inventory value with a bullish outlook. The corporate’s earnings report and outlook again up the rosy sentiment. Nonetheless, contemplating the short-term weak point in software program shares proper now, I might solely contemplate PANW inventory as an funding if I deliberate to purchase and maintain for a number of years. Within the quick time period, I’m anticipating continued volatility and weak point.
On the date of publication, Patrick Sanders didn’t have (both straight or not directly) positions in any of the securities talked about on this article. All data and information on this article is solely for informational functions. This text was initially revealed on Barchart.com
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