Palo Alto Networks PANW shares have lost 8.5% since the company reported its third-quarter fiscal 2026 results on June 2. The decline in share price can be attributed to the rising integration and acquisition-related costs.
As a result of back-to-back acquisitions, PANW is incurring high integration-related costs, including onboarding employees, aligning go-to-market teams and integrating systems and operations. Acquisition-related costs in the third quarter of fiscal 2026 amounted to $113 million, a whopping increase from $5 million incurred in the prior quarter. These costs are expected to hurt the company's profitability before the benefits of synergies from acquisitions are fully realized.
Further, PANW’s non-GAAP operating expenses rose to $1.46 billion in the third quarter of fiscal 2026, up from $1.19 billion incurred in the prior quarter. As a percentage of revenues, operating expenses expanded 290 basis points, sequentially. As a result, non-GAAP operating income margin contracted 320 basis points on a sequential basis. PANW is incurring rising costs, which could lead to slower operating leverage and warrants some caution about the company’s near-term prospects.
PANW’s Premium Valuation Warrants a Cautious Approach
Palo Alto Networks, Inc. (PANW) is currently trading at a high price-to-sales (P/S) multiple, above the Zacks Security industry. Palo Alto Networks’ forward 12-month P/S ratio sits at 16.84X, higher than the Zacks Security industry’s forward 12-month P/S ratio of 15.39X. The Zacks Value Score of F also suggests that PANW stock is overvalued.
PANW Forward 12-Month P/S Ratio
Image Source: Zacks Investment Research
The stock trades at a premium valuation to other industry peers, including Qualys QLYS, Zscaler ZS and Check Point Software CHKP. At present, Qualys, Zscaler and Check Point Software have P/S multiples of 5.18X, 5.54X and 4.95X, respectively.
However, for investors, not everything is gloom and doom.
PANW’s Prospects Benefits From Positive Industry Tailwinds
Palo Alto Networks is well-positioned to capitalize on the growing demand for advanced cybersecurity solutions. According to Fortune Business Insights, the global cybersecurity market is projected to expand from $248.28 billion in 2026 to $699.39 billion by 2034, representing a massive addressable market. As cyber threats become more sophisticated, enterprises are increasingly prioritizing multi-layered security platforms, which directly contribute to PANW’s strengths.
Palo Alto Networks’ wide range of innovative products, strong customer base and growing opportunities in areas like Zero Trust, Secure Access Service Edge (SASE) and private 5G security continue to support its long-term growth potential. For example, in the third quarter of fiscal 2026, SASE was Palo Alto Networks’ fastest-growing segment, with SASE Annual recurring revenues (ARR) increasing 40% year over year. Growth is mainly coming from customers who want to reduce the number of security tools they use.
Many organizations are moving away from older SASE products that do not provide a full view of their networks, cloud workloads and remote users. One of Palo Alto Networks' largest deals in the third quarter was an $80 million contract with a leading U.S. power producer. The customer selected the company's next-generation firewalls and SASE platform to secure a workforce of more than 25,000 employees. The company reported nearly 50 displacement wins totaling approximately $200 million in contract value year to date, highlighting continued market share gains. Further, PANW has sold more than 11 million secure browser licenses during the third quarter, representing a fourfold increase from the prior-year period.
The above-mentioned factors should continue to support PANW’s long-term growth as demand for cybersecurity solutions across enterprises continues to rise. The Zacks Consensus Estimate for fiscal 2026 and 2027 indicates revenue growth of around 23.7% and 20.2%, respectively.
Image Source: Zacks Investment Research
The above-mentioned factors seem to have instilled investors’ confidence in PANW’s prospects, as reflected in a rise in share price over the past six months.
PANW stock has surged 39.5% over the past six months, outperforming the industry’s return of 31.1%. The stock has outperformed its industry peers as well, such as Qualys, Zscaler and Check Point Software. Over the past six months, shares of Qualys, Zscaler and Check Point Software have plunged 26.7%, 46.2% and 30%, respectively.
6-Month Price Return Performance
Image Source: Zacks Investment Research
Conclusion: Hold PANW Stock Right Now
Palo Alto Networks remains a leader in cybersecurity, with a strong long-term growth trajectory, continued AI-driven innovation and a shift toward a more predictable recurring revenue model. Growth in areas such as SASE and platform-based security offerings remains strong, supported by large enterprise deals and increasing customer adoption, which provides a favorable long-term growth opportunity for the company.
However, Palo Alto Networks faces near-term risks from rising integration costs due to large acquisitions, which are hurting the company’s margins. Further, the company’s premium valuation warrants a cautious approach to the stock.
Currently, Palo Alto Networks carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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This article originally published on Zacks Investment Research (zacks.com).