Palo Alto Networks just delivered a fiscal Q2 that beat on every line that matters — $1.03 EPS versus the 94 cents analysts expected, $2.59 billion in revenue against a $2.58 billion consensus. Next-generation security annual recurring revenue jumped 33%. By any reasonable standard, this was a strong quarter for the cybersecurity giant.
The stock dropped 7% anyway.
The culprit? Forward guidance. Palo Alto forecast Q3 earnings of just 78 to 80 cents per share, which landed below what Wall Street had penciled in. And the company trimmed its full-year profit estimate to $3.65–$3.70, down from the prior $3.87. The reason: rising costs from an aggressive acquisition spree aimed at building out AI-powered security capabilities. The $25 billion CyberArk deal just closed. Chronosphere was completed in January. And on Tuesday, the company announced yet another buy — Israeli startup Koi, focused on securing agentic AI workflows.
But the bigger story here is not about Palo Alto specifically. It is about the market’s sudden terror that artificial intelligence is coming for the entire software sector. The iShares Expanded Tech-Software ETF (IGV) has cratered more than 23% this year. AI tools from Anthropic and OpenAI are creating enterprise workflows, websites, and automations in seconds — and investors are pricing in the possibility that traditional seat-based SaaS models are structurally broken.
CEO Nikesh Arora is not buying the panic, at least not for cybersecurity. “I’m still confused why the market is treating AI as a threat to at least cybersecurity,” he told analysts. “Customers have figured out that they need to drive more consistency in their security stack to be able to respond faster using AI.” His argument: AI is not replacing security — it is creating more attack surface that demands better security. Every AI agent, every automated workflow, every new integration point is a new vulnerability. The more AI proliferates, the more you need Palo Alto.
He might be right. But the market does not care about nuance when it is in selloff mode. Palo Alto is down 21% over the last year and 11% year-to-date. For investors with a longer time horizon, a company posting 33% ARR growth while trading at a steep discount to its recent highs starts to look interesting. The question is whether Wall Street will give it credit for building an AI security moat before the short-term pain subsides — or whether the software rout has more room to run.