PANW: AI Security And Observability Deals Will Shape Future Share Repricing

The analyst price target for Palo Alto Networks has been trimmed slightly to reflect a fair value adjustment of about US$1. Analysts are balancing mixed sector sentiment and acquisition-related concerns with ongoing support from firms that emphasize the company’s role in consolidating cybersecurity budgets, as well as its potential benefits from AI and observability exposure.

Analyst Commentary

Recent research on Palo Alto Networks reflects a split view, with some bullish analysts highlighting the company's position in cybersecurity consolidation and AI, while more cautious voices focus on acquisition risks, competitive pressure in observability, and valuation questions.

Bullish Takeaways

Bullish analysts point to the company’s role in consolidating security tools and budgets, arguing that this can support execution on large enterprise deals and help sustain growth across its platform.
Several firms that raised or maintained higher price targets in the US$230 to US$250 range cite the company’s exposure to AI and the convergence of security and observability as important growth drivers embedded in their valuation work.
The planned Chronosphere and CyberArk deals are viewed by some as expanding the addressable opportunity in next generation security and observability, which they see as supportive of long term annual recurring revenue ambitions such as the US$20b FY30 target mentioned in recent research.
Supportive analysts also reference solid Q1 metrics such as annual recurring revenue, remaining performance obligations, and free cash flow, using those to justify maintaining Outperform or Buy ratings alongside higher fair value estimates.

Bearish Takeaways

Bearish analysts highlight decelerating revenue growth and describe the recent quarter as sufficient rather than transformational, arguing that the risk or reward profile has become less attractive with limited room for upward estimate revisions in fiscal 2026 and 2027.
The downgrade to a Reduce rating with a US$157 price target underscores concerns about the potential for a share re rating, with some research pointing to the chance of a less favorable reset if growth expectations are not met.
Some cautious research flags weakening sentiment into 2026 and suggests stock selection could be challenging within cybersecurity, even if sector spending expectations remain healthy relative to broader IT budgets.
Acquisition related commentary includes concerns around the timing and pricing of the Chronosphere deal, with at least one firm describing the US$3.35b purchase price as not cheap and questioning the leverage versus other pending transactions, which feeds into a more conservative stance on execution risk and valuation.

What's in the News

Palo Alto Networks is reported to be in talks to acquire Israeli cybersecurity startup Koi for about US$400m, which would extend its spending on deals beyond Chronosphere and CyberArk (CTech).
Chinese authorities have reportedly banned software from Palo Alto Networks and Fortinet in the country, adding a regulatory overhang to the company’s international exposure (Reuters).
The U.S. administration is reported to be weighing the use of private companies, including security vendors such as Palo Alto Networks, in future cyberwarfare efforts, tying the name to potential government cyber initiatives (New York Times).
Palo Alto Networks and Google Cloud announced an expanded partnership that combines Google Cloud AI and infrastructure with Prisma AIRS to secure AI workloads and developer tools across hybrid multicloud environments, underpinned by a multibillion dollar commitment to Google Cloud.
The company outlined a new phase of AI focused product moves, including Prisma AIRS integrations with Factory, Glean, IBM and ServiceNow to provide in line protection for AI agents, coding workflows and enterprise AI platforms.

Valuation Changes

Fair Value: trimmed slightly from US$227.49 to US$226.65, reflecting a modest reduction of about US$0.84 in the modelled estimate.
Discount Rate: adjusted marginally from 8.41% to 8.39%, indicating a very small change in the assumed cost of capital.
Revenue Growth: kept effectively stable, remaining at 13.68% in the updated assumptions.
Net Profit Margin: nudged higher from 16.40% to 16.41%, signalling a small tweak to long term profitability expectations in the model.
Future P/E: lowered slightly from 102.37x to 101.83x, pointing to a modest recalibration of the valuation multiple used in the forecast period.

Leadership in AI-driven, integrated cloud security platforms supports strong recurring revenue growth and positions the company for expanding market share as enterprises modernize cybersecurity.
Industry consolidation and platformization trends drive larger deal sizes, improved retention, and higher margins through increased software focus and operational efficiency.
Heightened integration, competition, regulatory and R&D pressures threaten profitability, revenue stability, and long-term international expansion by raising costs and amplifying operational and market risks.

Catalysts

About Palo Alto Networks

Provides cybersecurity solutions worldwide.What are the underlying business or industry changes driving this perspective?

Accelerated enterprise adoption of AI and cloud technologies is dramatically expanding the attack surface, driving sustained and growing demand for comprehensive cybersecurity solutions. Palo Alto Networks' leadership in integrated, AI-powered security platforms positions the company to capture a higher share of security budgets, directly supporting robust, long-term revenue growth.
The proliferation of multi-cloud and hybrid environments, along with the rapid increase in connected devices, is fueling enterprise need for unified, cloud-native security solutions. Palo Alto Networks' deep integration with all major public clouds and shift to software
and SaaS-based offerings provide clear visibility and predictability on recurring revenues and cash flows.
Ongoing industry consolidation, as enterprises seek to simplify and maximize the effectiveness of their security stack, has strengthened the trend towards platformization, resulting in larger multi-platform deal sizes, improved cross-sell, higher net retention rates (120%), and near zero churn among platformized clients-all of which support future margin expansion and earnings growth.
Strategic investments in AI-driven security, automation, and differentiated product innovation (e.g., AI firewalls, SASE, secure browser, Cortex Cloud, XSIAM) are driving rapid ARR growth in high-value segments (>32% NGS ARR growth and over 2.5x AI ARR YoY)-supporting a move towards higher-margin, recurring revenue streams, and improved long-term net margins.
Enhanced operating efficiencies from scale, a higher mix of software sales, prudent cost controls, and a strong deferred payments portfolio have already led to expanding operating margins (now above 30%) and high free cash flow margins (38%+ with structural visibility to 40%+), directly benefiting future earnings, free cash flow, and shareholder returns.

Palo Alto Networks Earnings and Revenue Growth

Palo Alto Networks Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Palo Alto Networks's revenue will grow by 13.1% annually over the next 3 years.
Analysts assume that profit margins will increase from 12.3% today to 15.0% in 3 years time.
Analysts expect earnings to reach $2.0 billion (and earnings per share of $2.7) by about September 2028, up from $1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.5 billion in earnings, and the most bearish expecting $1.5 billion.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 99.0x on those 2028 earnings, down from 116.5x today. This future PE is greater than the current PE for the US Software industry at 36.2x.
Analysts expect the number of shares outstanding to grow by 2.72% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 8.4%, as per the Simply Wall St company report.

Palo Alto Networks Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

Ongoing platform integration and acquisition risks-including the proposed CyberArk acquisition-may lead to product cohesion and operational challenges, potentially slowing innovation and increasing customer churn, thereby impacting long-term revenue growth and earnings stability.
Escalating R&D requirements and the constant need to remain at the forefront of AI, identity, and cloud-native security could result in sustained high operating expenses, which may limit operating leverage and put downward pressure on net margins over time.
Increasing industry competition, including the proliferation of open-source security solutions, democratization of AI security tools, and moves by cloud providers to embed native security features, could compress pricing, commoditize offerings at the lower end, and erode gross margins and revenue growth.
Rising regulatory demands and global data sovereignty laws may increase compliance costs, complexity, and restrict entry into key international markets, which could curtail Palo Alto Networks' long-term international revenue expansion and elevate liability exposure, negatively affecting profit margins.
Heavy reliance on large-scale enterprise "platformization" deals and customer consolidation exposes the company to greater deal volatility; any slowdown in new large deals or retention among these major customers could reduce revenue predictability and increase earnings risk.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of $214.209 for Palo Alto Networks based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $240.0, and the most bearish reporting a price target of just $131.0.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $13.3 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 99.0x, assuming you use a discount rate of 8.4%.
Given the current share price of $197.55, the analyst price target of $214.21 is 7.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

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Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

PANW: AI Security Leadership Will Shape Future Outlook Amid New Challenges