On Wednesday, BTIG downgraded Palo Alto Networks (NASDAQ:PANW) stock from Buy to Neutral. The revision follows a detailed assessment of the company's position in its core network security market and the growth dynamics of its next-generation security (NGS) business. Powell expressed skepticism about the company's ability to sustain a growth rate exceeding 15%.
The analyst pointed out that there appears to be minimal potential for Palo Alto Networks to exceed the current NGS Annual Recurring Revenue (ARR) estimates for this year. Concerns were also raised about a potential deceleration in the NGS segment's growth in fiscal years 2026 and 2027. This deceleration is anticipated as the company cycles past the conversion of traditional firewall subscriptions to advanced NGS ARR offerings.
Contrasting with the optimistic Street forecasts, which predict an acceleration of revenue growth from 14.0% in fiscal year 2025 to 15.7% and 16.5% in the subsequent two years, Powell expects the growth trajectory to decline to the low double-digit range in the coming years. This projection is more conservative than the current consensus estimates.
Palo Alto Networks' stock is currently valued at 27.5 times its estimated calendar year 2026 enterprise value to free cash flow (EV/FCF), a multiple that aligns with peers experiencing low double-digit growth rates. Given the limited catalysts for stock appreciation in the near term and the potential risks to longer-term estimates, Powell sees the risk-reward balance for the shares as neutral at their present valuation.
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