Palo Alto Networks (PANW) just delivered better-than-expected financial results for its fiscal third quarter of 2025. The cybersecurity leader continues to witness solid demand for its advanced security solutions, particularly in its Next-Generation Security (NGS) segment. However, beneath the top-line strength lies a deceleration in growth, which is a concern.

A key highlight this quarter was the NGS Annualized Recurring Revenue (ARR), which crossed a significant milestone. The company reported $5.09 billion in NGS ARR by the end of Q3, representing a 34% increase year over year. This reflects the ongoing demand for Palo Alto’s offerings, especially Cortex. Notably, the company’s AI ARR alone reached approximately $400 million, more than doubling over the past year and signaling growing traction for its AI offerings.

Despite these achievements, the pace of growth has consistently decelerated. A year ago, in Q3 fiscal 2024, the NGS ARR was growing at a 47% clip. Fast forward to today, and that growth has cooled to 34%. It’s still healthy, but the downward trend is hard to ignore. Such a slowdown raises a red flag for a company that trades at a significantly high valuation.

That said, Palo Alto’s fundamentals remain solid, and its product ecosystem continues to expand into key areas like AI-driven security. However, can PANW maintain its momentum and justify its premium? Let’s take a closer look.

Palo Alto’s Fundamentals Remain Solid

Palo Alto’s operational performance remains strong. Total Q3 revenue came in at $2.29 billion, up 15% year over year, with product and services revenues growing 16% and 15%, respectively. Subscription-based services rose 18%. On a trailing 12-month basis, nearly 40% of product revenue is now software-based.

Geographically, the company posted double-digit growth across all regions. Meanwhile, the remaining performance obligations (RPO), a measure of contracted future revenue, rose 19% to $13.5 billion. Notably, the average contract duration hovers around three years, signaling steady customer commitment.

Another sign of strength is Palo Alto’s growing roster of large customers. The company now counts 130 clients spending over $5 million annually on NGS offerings, a 40% year-over-year increase. Even more compelling is the 60% growth in customers with NGS ARR over $10 million. These metrics reflect the stickiness of Palo Alto’s platform-based model, which continues to deepen its enterprise relationships.

Part of what’s fueling this customer engagement is Palo Alto’s aggressive investment in AI-driven security solutions, primarily through its Cortex platform. Cortex extended security intelligence and automation management (XSIAM), its AI-driven security platform, is particularly noteworthy. With ARR growth exceeding 200% year over year, XSIAM is Palo Alto’s fastest-growing product, attracting around 270 customers with an average ARR of over $1 million each. Moreover, on a trailing 12-month basis, XSIAM bookings are near $1 billion.  That level of uptake shows the solid demand for this offering.

Management is also optimistic about Cortex Cloud. Although still in its early days, the platform is already showing promise with a growing pipeline of enterprise interest.

Valuation Concerns

While PANW’s fundamentals remain strong, its stock looks overvalued. PANW stock trades at a forward price-earnings (P/E) multiple of 110.71x, and its price-sales (P/S) multiple stood at 16.03x. These elevated valuation metrics indicate that the market has already priced in significant future growth.

Wall Street analysts remain generally bullish, with a “Moderate Buy” consensus. While the long-term growth story remains intact, investors should weigh the company’s strong fundamentals against a valuation that leaves little room for error.

Bottom Line

Palo Alto Networks continues to execute well and lead innovation in the cybersecurity space. Its shift toward AI and cloud-native solutions is paying off, and its customer base is growing. However, investors should take caution as growth starts to decelerate and the stock trades at significantly higher multiples.