Palo Alto Networks' latest results suggest that AI systems security may become one of the fastest growing segments of the overall technology market. The stock is experiencing high volatility, but investors are much more critical this morning than they were yesterday immediately after the results were announced.
Results that beat Wall Street's expectations
Palo Alto Networks $PANW released its fiscal third quarter 2026 results and pleased investors on virtually every metric tracked. Revenue reached $3 billion, up 31% year-over-year . Meanwhile, analysts were expecting approximately $2.94 billion. The recent acquisitions of CyberArk and Chronosphere also played a significant role, contributing $388 million to revenue.
Even more important than the revenue itself, however, is the structure of the growth. The company has seen a sharp increase in recurring revenue from next-generation products that include cloud security, identity protection, security process automation and AI-based solutions. Annual recurring revenue in this area grew to $8.1 billion, representing 60% year-over-year growth.
Another strong indicator was the growth in Remaining Performance Obligations, or future contracted revenue. These reached $18.4 billion , up 36% year-on-year. This figure is often considered one of the best indicators of future growth in the software sector.
Shares rose as much as 12.5% in the aftermarket immediately after the results were released. Today, before the market opens, investors are gradually selling off the stock. So all the growth from last night is there and the stock is now even losing over 4%.
A loss that didn't scare investors
At first glance, it may surprise you that the company posted a net accounting loss of $177 million. Meanwhile, it posted a profit of $262 million in the same period a year ago. But the reason was not a deterioration in the operating business.
The main reasons were acquisition-related costs, amortization of intangible assets and one-time accounting items related to the integration of newly acquired companies.
However, operating cash flow was positive. The company generated $871 million of operating cash during the quarter and adjusted free cash flow was $910 million. This confirms that the underlying business remains very profitable.
AI as the engine of the new growth cycle
CEO Nikesh Arora said:
"Recent advancements in artificial intelligence have significantly increased the urgency to invest in cybersecurity."
According to him, companies are beginning to understand that AI is not just a productivity tool. At the same time, it is creating new opportunities for attacks, automating hacking operations and increasing the complexity of enterprise systems security. That's why companies are looking for comprehensive security platforms that can protect infrastructure, data and AI models.
Prisma AIRS, a service that focuses specifically on protecting AI applications and models, is gaining a lot of attention. The number of customers has surpassed the 100 mark and order volume is doubling quarter-over-quarter, according to management.
Palo Alto isn't just trying to respond to the AI trend, it's building a whole new category of security products. If the adoption of generative AI continues at its current pace, this area could become one of the company's main sources of growth over the next decade.
Competition and market position
Cybersecurity is one of the most competitive segments of the technology sector. In addition to Palo Alto Networks, CrowdStrike $CRWD, Zscaler $ZS, Fortinet $FTNT, and the newly acquired CyberArk are also active here.
However, Palo Alto has several advantages. It has a large customer base among the world's largest enterprises, a strong position in network security, and an increasingly successful strategy of so-called platformization. This involves customers using multiple security solutions from a single vendor instead of dozens of different products.
It is this approach that has helped the company significantly increase customer retention and accelerate recurring revenue growth over the past few years.
Strategic insight
Cybersecurity, although it didn't seem like it at the beginning of the market, is one of the segments that will benefit from the AI segment. As more companies implement AI, new security risks are emerging. The growing number of autonomous AI agents, cloud applications and data streams are creating an environment that requires increasingly sophisticated protection.
In addition, Palo Alto is combining strong growth with high cash generation and a growing backlog of long-term contracts. These are characteristics that investors in the technology sector typically value at a premium multiple.
On the other hand, it should be noted that the stock is trading at a very high valuation after a sharp growth spurt. The market is already largely pricing in continued rapid growth in the years ahead. Any slowdown could therefore lead to a more significant correction.
According to the Fair Price Index, $PANW shares were up to 50% above their fair value at yesterday's closing price .
Palo Alto Networks delivered one of the strongest quarters in its history. Revenue is up more than 30%, recurring revenue from next-generation products is accelerating even faster, and management raised its full-year outlook.
Artificial intelligence isn't just creating new opportunities for chipmakers and cloud companies. At the same time, it is creating a whole new generation of security threats that will require ever-greater investment in data protection, identity and AI systems. It is in this environment that Palo Alto Networks is seeking to establish market dominance. And this quarter, it demonstrated that it is succeeding.