Jitters Hit PANW Stock on Palo Alto Margins and Slowing Contracts, Despite Solid Q1

Quick overview

Palo Alto Networks improved its Q4 profit projection and exceeded top- and bottom-line expectations for Q3, but it also reported a narrower-than-expected gross margin, which caused analysts to react differently. As a result, PANW shares plummeted 4%.

Earnings Beat Overshadowed by Guidance

Palo Alto Networks delivered solid fiscal third-quarter results, with both revenue and adjusted earnings surpassing Wall Street expectations. The company reported adjusted earnings per share of 80 cents on revenue of $2.29 billion, compared to consensus forecasts of 77 cents and $2.28 billion, respectively. Year-over-year, sales climbed 15%—a healthy gain from the $1.98 billion recorded in the same period last year.

PANW Stock Chart Daily – Will Open With A Bearish Gap Tomorrow

Despite this top-line growth, the stock slipped in after-hours trading. Shares fell about 4%, moving from $194.48 to $186.65, as investors responded coolly to the company’s forward outlook.

Margin Pressure Raises Concerns

While results showed growth, the company’s non-GAAP gross margin of 76% missed analyst expectations of 77.2%. This margin compression comes as Palo Alto pushes its “platformization” initiative—an effort to bundle its cybersecurity offerings and promote adoption by offering discounted products.

Although this approach is designed to drive broader engagement across its ecosystem, it’s weighing on near-term profitability. Investors appear wary that this discount-led growth may not deliver strong returns quickly enough.

Palo Alto Networks Q3 Performance vs. Expectations

Earnings Per Share (EPS):

• Reported: $0.80 (adjusted)
• Expected (LSEG consensus): $0.77
• Beat estimates by 3 cents

Revenue:

• Reported: $2.29 billion
• Expected: $2.28 billion
• Slight beat, representing 15% year-over-year growth from $1.98 billion

Net Income:

• Fell to $262.1 million, or $0.37 per share, from $278.8 million, or $0.39 per share a year ago
• Indicates margin compression despite revenue growth

Guidance & Margins

Q4 EPS Outlook (adjusted):

• Forecast: $0.87 to $0.89
• Analyst estimate: $0.86
• Forward guidance topped expectations

Non-GAAP Gross Margin:

• Reported: 76%
• Expected: 77.2%
• Missed margin target, potentially due to cost pressures or product mix

Capital Expenditures:

• Reported: $68.3 million
• Expected: $70.8 million
• Slightly lower than expected, could reflect disciplined spending

Slowing RPO Growth Sparks Further Skepticism

Another point of concern was the deceleration in remaining performance obligations (RPO), a forward-looking indicator of revenue from existing contracts. While still positive, the slowing pace of RPO growth suggests that enterprise clients may be more cautious, or that contract cycles are becoming elongated.

The company’s guidance for fourth-quarter earnings—projected at 87 to 89 cents per share—was slightly above analysts’ 86-cent consensus, but the lack of a decisive beat seemed insufficient to restore investor confidence.

Conclusion: Balancing Growth and Profitability

Palo Alto Networks finds itself in a delicate balancing act: driving platform adoption through strategic discounts while maintaining healthy margins and forward momentum. While the fundamentals remain sound and the company continues to grow, the mixed signals on profitability and contract growth have introduced a note of hesitation among investors.

As a result, despite the earnings beat, the reaction underscores how high expectations in the cybersecurity sector leave little room for anything less than exceptional forward visibility.

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Skerdian Meta

Lead Analyst

Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.

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