Can Rising Network Security Demand Boost PANW's Long-Term Growth?

Palo Alto Networks PANW is seeing stronger growth in its Network Security business as enterprises increase spending on AI and cloud infrastructure. Network Security is the company's largest business, accounting for about 70% of total revenues. In the third quarter of fiscal 2026, management said Network Security had its strongest quarter in several years, with growth across hardware, SASE and software firewalls. This gives the business a large base from which to benefit from higher security spending.

Next-generation firewall bookings grew nearly 40% year over year in the third quarter. PANW said demand was supported by its latest Gen 5 appliances and AI data center buildouts. The company is also seeing demand from AI labs and sovereign infrastructure providers, which are new customer groups for its firewall business. Hardware revenues represent about 10% of total revenues, but the business had its best quarter in a decade and ended the quarter with a record backlog. This suggests that AI infrastructure spending is creating an additional demand opportunity for PANW's firewall business.

Software firewalls are adding another source of growth. Software firewall ARR increased 25% year over year as customers expanded their capacity to inspect traffic between cloud and AI workloads. PANW expects AI adoption to create more machine-to-machine traffic, increasing the need for security inspection. Management said customers are using more of its security products, with an average of more than four subscriptions per device in its installed base. This gives PANW another way to increase revenues as customers expand their security deployments.

The increase in AI-related traffic could support Network Security growth over the next several quarters. PANW expects data center expansion and higher traffic volumes to remain key growth drivers for the next few quarters, and potentially several years. With firewall bookings up nearly 40%, software firewall ARR up 25% and Network Security accounting for most of PANW's revenues, continued AI infrastructure spending could make this business an important driver of overall growth.

How Competitors Fare Against PANW

Competitors like CrowdStrike CRWD and Zscaler ZS are also gaining ground through platform expansion and AI innovation.

CrowdStrike is also benefiting from rising AI-related cybersecurity demand. CrowdStrike is seeing strong demand for its AI Detection and Response (AIDR) solution. CRWD's AIDR solution is designed to help companies monitor and secure AI applications, agents and workloads as AI adoption grows across enterprises. Management highlighted AIDR as one of the company's fastest-growing products in the first quarter of fiscal 2027. In the first quarter, AIDR's ending ARR grew more than 250% sequentially. Further, AIDR has already secured a pipeline of more than $50 million for the second quarter of fiscal 2027.

Zscaler is seeing strong adoption of its Zero Trust Everywhere strategy, which is helping the company expand beyond its traditional user security offerings. The strategy combines security for users, cloud workloads and branch locations on a single platform. The company ended the third quarter of fiscal 2026 with more than 700 Zero Trust Everywhere enterprises, up from over 550 in the previous quarter. As more customers adopt multiple products across the platform, Zero Trust Everywhere could help Zscaler increase customer spending, win larger deals and support long-term growth.

PANW’s Price Performance, Valuation & Estimates

Shares of Palo Alto Networks have jumped 90.7% in the year-to-date period compared with the Zacks Security industry’s appreciation of 69.7%.

PANW’s YTD Price Return Performance

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From a valuation standpoint, Palo Alto Networks trades at a forward price-to-sales ratio of 20.60X compared with the industry’s average of 17.23X. The Zacks Value Score of F suggests that PANW stock is overvalued.

PANW Forward 12-Month P/S Ratio

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The Zacks Consensus Estimate for Palo Alto Networks’ fiscal 2026 and 2027 earnings implies year-over-year growth of 13.2% and 8.7%, respectively. The estimates for fiscal 2026 and 2027 have remained unchanged over the past 30 days.

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Palo Alto Networks currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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