Can AI-Driven Platform Momentum Keep Aiding PANW's FCF Growth?

Palo Alto Networks PANW continues to ride strong momentum from its AI-driven platform strategy, which is playing a key role in boosting its free cash flow (FCF). In the third quarter of fiscal 2025, its adjusted FCF increased 13.5% sequentially to $578.4 million, while FCF margin expanded 270 basis points to 25.3%. This strength is driven by the rising adoption of its artificial intelligence (AI) integrated platforms like Cortex XSIAM and Prisma. 

AI is increasingly embedded into Palo Alto Networks’ offerings, which is helping it win multi-product deals. In the last reported quarter, the company added more than 90 new platformized deals. This included two multi-million-dollar deals worth $90 million and $46 million for its Cortex XSIAM. Also, Palo Alto Networks recently launched Prisma AI-Ready Security (Prisma AIRS), which aims to protect AI models from build to deployment across hybrid and multi-cloud setups. Just weeks after launch, Prisma AIRS has already built an eight-figure sales pipeline.

As customers consolidate their security needs on Palo Alto Networks’ platforms, the company gains scale benefits and cost efficiencies. Multi-platform customers grew nearly 70% year over year, while those using Cortex tripled in the third quarter. Moreover, XSIAM’s annual recurring revenues increased 200% year over year, and with AI infrastructure spending projected to exceed $300 billion in the next 12 months, PANW is well-positioned to capitalize on this trend.

Additionally, PANW’s shift to annual billing and a subscription-heavy model provides more predictability about revenues and FCF. During its third-quarter earnings call, the company stated that about 80% of expected fourth-quarter collections have already been booked, which reflects visibility into near-term FCF.

Looking ahead, Palo Alto Networks forecasts $15 billion in annual recurring revenues by fiscal 2030. With 1,250 of its top 5,000 customers already on platformized deals and AI adoption accelerating, PANW’s FCF profile looks increasingly durable. The company expects to generate an adjusted FCF margin between 37.5% and 38% in fiscal 2025, while maintaining over a 37% margin in fiscal 2026 and 2027.

How Competitors Fare Against PANW

Zscaler ZS and CrowdStrike CRWD are also evolving their platforms to meet enterprise security demands.

Zscaler continues to expand its Zero Trust Exchange platform. In the third quarter of fiscal 2025, Zscaler reported ARR of $2.9 billion, up 23% year over year. Zscaler’s Zero Trust Everywhere, Data Security Everywhere, and Agentic Operations are becoming its main growth engine. Together, these innovative categories are approaching $1 billion in ARR. However, Zscaler’s FCF margin declined 18.2% sequentially.

In the first quarter of fiscal 2026, CrowdStrike introduced Falcon Next-Gen SIEM and Charlotte AI. While Charlotte AI functions as a generative AI security analyst, reducing the support time provided by cybersecurity professionals, CrowdStrike’s Falcon Next-Gen SIEM provides a unified platform for detecting threats, investigating attacks and responding to them. Moreover, CrowdStrike’s FCF margin improved 8.7% sequentially.

PANW’s Price Performance, Valuation and Estimates

Shares of Palo Alto Networks have gained 6% year to date compared with the Security industry’s growth of 27.1 %.

PANW YTD Price Return Performance

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From a valuation standpoint, Palo Alto Networks trades at a forward price-to-sales ratio of 12.33X, lower than the industry’s average of 15.23X.

PANW Forward 12-Month P/S Ratio

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The Zacks Consensus Estimate for PANW’s fiscal 2025 and 2026 earnings implies year-over-year growth of 15.14% and 11.38%, respectively. The estimates for fiscal 2025 and 2026 have both been revised upward in the past 60 days, respectively.

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Palo Alto Networks currently 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).

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