Analysts favor margins over growth
- Palo Alto Networks and other software names entered 2026 with investors rewarding margin durability, after security demand and recurring-revenue growth held up. - Palo Alto reported 15% fiscal second-quarter revenue growth, 33% next-generation security annual recurring revenue growth, and a 76.1% gross margin. - April’s software selloff sharpened the split between profitable platforms and weaker growers. (reuters.com)
Wall Street’s software trade in 2026 has tilted toward companies that can hold margins while still growing, and Palo Alto Networks sits near the center of that shift. (paloaltonetworks.com) (reuters.com) Palo Alto said on February 17 that fiscal second-quarter revenue rose 15% to $2.6 billion, while next-generation security annual recurring revenue climbed 33% to $6.3 billion. Remaining performance obligation, a backlog measure, rose 23% to $16.0 billion. (paloaltonetworks.com) The company also posted a 76.1% non-GAAP gross margin and guided fiscal 2026 non-GAAP operating margin to 28.5% to 29.0%. It raised full-year revenue guidance to $11.28 billion to $11.31 billion and next-generation security ARR guidance to $8.52 billion to $8.62 billion. (paloaltonetworks.com) That combination has become a dividing line across software. Reuters reported on April 23 that IBM and ServiceNow helped trigger a software selloff as investors worried that artificial intelligence could pressure parts of the sector, even as some chip names held up better. (reuters.com) In that market, recurring revenue and gross margin act like proof that a company can add artificial intelligence features without letting computing costs or sales spending swallow the business. Palo Alto’s subscription-heavy security mix gives investors more visibility than companies still relying on one-time licenses or weaker renewal trends. (paloaltonetworks.com) (windsordrake.com) The same logic has spread beyond cybersecurity. A fourth-quarter 2025 AI software valuation report from Windsor Drake said gross-margin profile, revenue durability, net revenue retention, and compute efficiency were shaping valuation ranges more than the “AI” label alone. (windsordrake.com) That helps explain why some non-chip AI companies have kept premium valuations even as investors turned more selective on software this spring. The market is paying more for businesses that can show both adoption and operating discipline, not just fast top-line expansion. (reuters.com) (windsordrake.com) Palo Alto’s numbers do not prove the whole sector has been rerated on margins alone, but they fit the template investors have favored in 2026: sticky subscriptions, high gross margins, and guidance that still moves up. (paloaltonetworks.com)
