Palo Alto Networks (PANW)

Cybersecurity platform provider Palo Alto Networks (NASDAQ:PANW) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 15.7% year on year to $2.47 billion. The company expects next quarter’s revenue to be around $2.58 billion, close to analysts’ estimates. Its non-GAAP profit of $0.93 per share was 4.4% above analysts’ consensus estimates. Palo Alto Networks also announced its intent to acquire Chronosphere, a next-generation observability platform for the data center era.

Company Overview

Founded in 2005 by security visionary Nir Zuk who sought to reimagine firewall technology, Palo Alto Networks (NASDAQ:PANW) provides AI-powered cybersecurity platforms that protect organizations' networks, clouds, and endpoints from sophisticated threats.

Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks. The migration of businesses to the cloud and employees working remotely in insecure environments is increasing demand modern cloud-based network security software, which offers better performance at lower cost than maintaining the traditional on-premise solutions, such as expensive specialized firewall hardware.

Palo Alto Networks faces competition from large tech companies that incorporate security features into their products, such as Cisco, Microsoft, and Google. It also competes with independent security vendors including Check Point Software, Fortinet, CrowdStrike, Zscaler, and Wiz, which offer various specialized security products.

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Palo Alto Networks’s sales grew at a decent 21.7% compounded annual growth rate over the last five years. Its growth was slightly above the average software company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within software, a half-decade historical view may miss recent innovations or disruptive industry trends. Palo Alto Networks’s annualized revenue growth of 15.2% over the last two years is below its five-year trend, but we still think the results were respectable.

This quarter, Palo Alto Networks reported year-on-year revenue growth of 15.7%, and its $2.47 billion of revenue exceeded Wall Street’s estimates by 0.5%. Company management is currently guiding for a 14.3% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 13.4% over the next 12 months, a slight deceleration versus the last two years. This projection is underwhelming and implies its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Palo Alto Networks’s billings came in at $1.95 billion in Q3, and over the last four quarters, its growth was underwhelming as it averaged 8.1% year-on-year increases. This alternate topline metric grew slower than total sales, meaning the company recognizes revenue faster than it collects cash - a headwind for its liquidity that could also signal a slowdown in future revenue growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Palo Alto Networks is extremely efficient at acquiring new customers, and its CAC payback period checked in at 20.7 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Palo Alto Networks more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Palo Alto Networks’s gross margin is better than the broader software industry and signals it has solid unit economics and competitive products. As you can see below, it averaged a decent 73.5% gross margin over the last year. That means for every $100 in revenue, roughly $73.47 was left to spend on selling, marketing, and R&D.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Palo Alto Networks has seen gross margins improve by 0.1 percentage points over the last 2 year, which is slightly better than average for software.

In Q3, Palo Alto Networks produced a 74.2% gross profit margin, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Palo Alto Networks has been an efficient company over the last year. It was one of the more profitable businesses in the software sector, boasting an average operating margin of 13.2%.

Looking at the trend in its profitability, Palo Alto Networks’s operating margin rose by 4.1 percentage points over the last two years, as its sales growth gave it operating leverage.

This quarter, Palo Alto Networks generated an operating margin profit margin of 12.5%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Palo Alto Networks has shown robust cash profitability, driven by its cost-effective customer acquisition strategy that enables it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 28.3% over the last year, quite impressive for a software business.

Companies with more cash than debt have lower bankruptcy risk.

Palo Alto Networks is a profitable, well-capitalized company with $4.21 billion of cash and $346 million of debt on its balance sheet. This $3.86 billion net cash position is 3% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was good to see Palo Alto Networks provide full-year EPS guidance that slightly beat analysts’ expectations. We were also glad its EPS guidance for next quarter slightly exceeded Wall Street’s estimates. Overall, this print had some key positives. Investors were likely hoping for more, and shares traded down 3.2% to $193.68 immediately after reporting.

Updated: December 4, 2025 at 9:18 PM EST

Before deciding whether to buy Palo Alto Networks or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

There are things to like about Palo Alto Networks. First off, its revenue growth was solid over the last five years. And while its expanding operating margin shows it’s becoming more efficient at building and selling its software, its bountiful generation of free cash flow empowers it to invest in growth initiatives. On top of that, its efficient sales strategy allows it to target and onboard new users at scale.

Palo Alto Networks’s price-to-sales ratio based on the next 12 months is 12.7x. Looking at the software space right now, Palo Alto Networks trades at a compelling valuation. If you trust the business and its direction, this is an ideal time to buy.

Wall Street analysts have a consensus one-year price target of $224.53 on the company (compared to the current share price of $195.50), implying they see 14.9% upside in buying Palo Alto Networks in the short term.