Palo Alto Networks had a strong quarter Tuesday night. But in a market where there is no margin for error, the cybersecurity giant stumbled on guidance and its stock price fell. The company’s revenue for the second quarter of 2026 (ending Jan. 31) rose 15% to $2.59 billion, beating the consensus estimate of $2.58 billion compiled by data provider LSEG. Earnings per share (EPS) increased 27% year over year to $1.03, beating LSEG’s estimate of 94 cents. PANW YTD Mountain Palo Alto Networks YTD Palo Alto Networks shares fell more than 8% in after-hours trading after the company reported lower-than-expected EPS estimates for the current quarter and lowered its full-year profit outlook. However, the semi-transparent outlook is that management has raised its guidance for current quarter and full-year revenue, as well as Next Generation Security’s annual recurring revenue (ARR). This suggests that the downward revision to profitability is not fundamental-related, but rather a result of share dilution resulting from the CyberArk and Chronosphere acquisitions. Conclusion With all the noise surrounding management’s guidance, and especially given the Software-as-a-Service (SaaS) Armageddon the stock has experienced over the past month, investors would do well to keep an eye on qualitative comments from the post-earnings conference call and quarterly release on the impact of artificial intelligence on Palo Alto’s business. Viewed through this lens, we feel much better about the year ahead and the opportunities Palo Alto stock presents than the after-hours decline and year-to-date difficulties. Additionally, Jim Cramer has repeatedly stated that cybersecurity stocks, including club names Palo Alto and CrowdStrike, should never have been lumped together with more traditional SaaS names in the first place. That’s how important cyber protection is in a world where AI is weaponized by both good and bad guys. I bought more CrowdStrike earlier this month. Why We Own It Cybersecurity is a long-term growth market, the bad guys are relentless, and businesses can’t afford not to invest in their defense. It’s a never-ending arms race, especially in the age of AI. Palo Alto Networks, in particular, believes it is uniquely positioned to win with a comprehensive platform solution for cybersecurity. Competitors: CrowdStrike (also a club stock), Fortinet, Cisco Systems Last purchase date: November 24, 2025 Start date: February 15, 2023 Palo Alto CEO Nikesh Arora said on a conference call that the introduction of AI is expanding the attack surface for organizations with more virtual agents, “more infrastructure, more machine-to-machine activity, and new types of risks that didn’t exist before.” Arora emphasized that a comprehensive platform approach to cybersecurity is not only important, but is in fact a means to enable AI deployment “securely and at scale.” He added, “As AI begins to interact autonomously across application infrastructures, fragmented security causes delays at precisely the wrong moments.” Arora said during a Q&A that the speed of AI means companies with multiple security vendors cannot respond quickly enough to threats. He added that customers understand this too, and there is growing demand for the type of platform strategy that Palo Alto offers. Comparing the current AI security and cloud security adoption curve to 10 years ago, Arora said everything is moving much faster this time. According to the CEO, greater control over AI agents will require greater cybersecurity adoption. That’s a view we certainly agree with. Another important aspect to consider the next time someone says Anthropic’s Claude will replace your entire security platform is the dynamics between the bad guys and those who keep them out. As Arora rightly reminded investors on the conference call, hackers can attack millions of times and only need to succeed once to wreak havoc. Palo Alto is right: we need to protect our clients’ systems 100%. Therefore, the CEO noted that while large-scale language models (LLMs) may function correctly even 95% of the time, they are not a threat to cybersecurity providers like Palo Alto until they approach 99.9% accuracy. That 4.9% is everything. Note that the LLM’s functionality is a result of the training data. But the important thing about cyber is that as the attack surface expands and the adoption of AI increases, it’s not old threats that businesses need to worry about. What security professionals need to worry about are new threats that have never appeared in training data. On this point, Arora says: “For the most part, our security products are at the edge, creating new data and logs that didn’t exist from everything that’s around them. So as long as you’re creating your own data and security, that’s the LLM We are not a system of record. We are not a system of work. We generate domain-specific data based on the threats we see in our environment and use it analytically to understand how our customers can better protect themselves. ” One analyst on the call asked why the increased demand hasn’t shown up in the numbers in a big way yet, and Arora was quick to respond that there is a lag, similar to what we’ve seen with cloud adoption. “And yet it literally took two or three year cycles for companies to fully move all their applications and workloads to the cloud.” The CEO fully expects the numbers to start showing. One way to see this is with the introduction of Prisma AIRS, Palo Alto’s AI-native security platform. It’s touted in the company’s slide deck as “one of the fastest growing products in company history,” with more than 100 customers and more than three-fold growth in consecutive years. By the way, even though Palo Alto’s stock price has plummeted, it has risen about 400% since mid-2018, when cloud adoption took off in earnest. That’s when patience pays off, and we believe it will pay off again this time with the AI revolution. Based on what we heard from management on Tuesday evening, we would like to reiterate our rating on Palo Alto’s stock at a “1” rating, which corresponds to a “buy.” However, considering that investors are many times more invested in software-related stuff, we lower the price target to 200%. Quarterly Commentary While the long-term impact of AI on cybersecurity will ultimately influence how investors view companies, there is no denying the business momentum. Palo Alto’s Next Generation ARR, which measures the annualized allocated revenue of all active contracts, and the company’s total remaining performance obligation (RPO), which represents business that is contracted but not yet performed, both exceeded expectations. Next Generation ARR re-accelerated to 33% in the second quarter of the fiscal year, up from 29% growth in the previous quarter. Despite some other setbacks, we are encouraged by the near-universal year-over-year growth and significant operating margin expansion. Regarding gross margins, the team cited product impacts from memory and storage prices, but added that the company is well-positioned to weather this headwind. Although not shown in the earnings table, it’s also worth noting that Palo Alto won approximately 110 net new platform deals in the second quarter. This represents approximately 35% year-over-year growth. Net retention rate (NRR) for platformed customers was 119%. Palo Alto defines NRR as “the percentage of NGS (next generation) ARR retained at the end of Q2 2026 from customers platformed at the end of Q2 2025, excluding the impact of Chronosphere.” In other words, the same customer population is generating 19% more NGS ARR than it did a year ago. Having a low churn rate helped, but it’s more about doing more business with existing customers than what’s lost through attrition. Guidance The Company has provided management guidance for the current quarter and full year. However, we do not believe that the consensus estimates reflect the impact of transactions with CyberArk or Chronosphere, so we refrain from including street forecasts. For Q3 2026, the team expects to deliver: Next Generation ARR in the range of $7.94 billion to $7.96 billion Remaining performance obligations in the range of $17.85 billion to $17.95 billion Revenue in the range of $2.941 billion to $2.945 billion Adjusted earnings will range from 78 cents to 80 cents per share Full-year 2026 guidance: Next Generation ARR will be between $8.52 billion and $8.62 billion, RPO will be between $20.2 billion and $20.3 billion Revenue will be in the range of $11.28 billion to $11.31 billion, up from the previous range of $10.5 billion to $10.54 billion Adjusted EPS was $3.65 to $3.70, down from the previous range of $3.80 to $3.90.Cramer’s Charitable Trust Long PANW, CRWD See here for the complete list of stocks. ) As a subscriber to Jim Cramer’s CNBC Investing Club, you will receive trade alerts before Jim Cramer makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. 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