Palo Alto Networks (PANW)

Cybersecurity platform provider Palo Alto Networks (NASDAQ:PANW) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, with sales up 15.8% year on year to $2.54 billion. Guidance for next quarter’s revenue was better than expected at $2.46 billion at the midpoint, 0.9% above analysts’ estimates. Its non-GAAP profit of $0.95 per share was 7.3% above analysts’ consensus estimates.

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.

Examining a company’s long-term performance can provide clues about its quality.

Any business can have short-term success, but a top-tier one grows for years.

Over the last three years, Palo Alto Networks grew its sales at a 18.8% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, Palo Alto Networks reported year-on-year revenue growth of 15.8%, and its $2.54 billion of revenue exceeded Wall Street’s estimates by 1.4%. Company management is currently guiding for a 15% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 13.2% over the next 12 months, a deceleration versus the last three years. Still, this projection is admirable and indicates the market sees success for its products and services.

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 $3.71 billion in Q2, and over the last four quarters, its growth was underwhelming as it averaged 1.8% 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 represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Palo Alto Networks is extremely efficient at acquiring new customers, and its CAC payback period checked in at 19.3 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

For software companies like Palo Alto Networks, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Palo Alto Networks’s gross margin is good for a software business and points to its solid unit economics, competitive products and services, and lack of meaningful pricing pressure. As you can see below, it averaged an impressive 73.4% gross margin over the last year. Said differently, Palo Alto Networks paid its providers $26.59 for every $100 in revenue.

Palo Alto Networks’s gross profit margin came in at 73.2% this quarter, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Palo Alto Networks has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 13.5%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Palo Alto Networks’s operating margin rose by 5 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, Palo Alto Networks generated an operating margin profit margin of 19.6%, up 8.7 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

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 terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 37.9% over the last year.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Palo Alto Networks is a profitable, well-capitalized company with $2.90 billion of cash and $721.4 million of debt on its balance sheet. This $2.18 billion net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by Palo Alto Networks’s optimistic full-year EPS guidance, which blew past analysts’ expectations. We were also glad its EPS guidance for next quarter exceeded Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 6.6% to $188.10 immediately after reporting.

Updated: November 16, 2025 at 9:14 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 a lot of things to like about Palo Alto Networks. To kick things 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 13.8x. Looking at the software landscape right now, Palo Alto Networks trades at a pretty interesting price. If you’re a fan of the business and management team, now is a good time to scoop up some shares.

Wall Street analysts have a consensus one-year price target of $219.13 on the company (compared to the current share price of $206.56), implying they see 6.1% upside in buying Palo Alto Networks in the short term.