PANW is a hold; valuation is too high (forward PE 68.6, DCF fair value $175 vs market $335) relative to declining margins and ROIC.

Palo Alto Networks is experiencing accelerating revenue growth as a result. The management team is forecasting at least 23% growth in the fiscal year 2027 and forecasting 40% free cash flow margin by fiscal year 2028.

So, does this make Palo Alto Networks stock a buying opportunity? Let's take a look at the business and answer that question together.

So, I think this chart here is really interesting looking at Palo Alto's revenue growth over the previous decade. And you can see more recently that inflection point, right? You see the revenue has been growing this entire time, but more recently since 2026, you can see that inflection point where the rate of increase is increasing, the slope is increasing.

And that's what the management team was talking about in its latest quarterly earnings report to investors, how demand for its services are accelerating, the backlog is booming, and the proliferation of agentic AI is the cause for this, and it's unlikely to end anytime soon.

That being said, Palo Alto Networks is not driving profit margin expansion as a result of this revenue growth, which is a little bit troubling to me. So, you can see the chart here for Palo Alto Networks operating profit margin over the previous decade.

And it's been up and down, right? There have been previous down moments in its operating profit margin trajectory, but for the most part, the trend has been higher over the previous decade, rising from -15% in 2017 to 6% in the most recent period.

But, it was as high as 12 and 1/2% about a year ago or earlier in 2026.

And so, whenever I see a company's revenue growth accelerating while operating profit margins or profit margins overall are coming down, it shows me that the revenue growth is not as high of quality.

It's not as strong of organic demand that these increases are coming at a cost.

I would much rather prefer a company's revenue growing and its operating profit margins expanding simultaneously in a demonstration of economies in scale. That's not what's happening here with Palo Alto Networks.

It's reinvesting, it's creating new products, it's made a couple of acquisitions, etc., etc. to drive some of this growth or to capitalize on some of this growth. The demand might already be there, but Palo Alto Networks may needed to make a few adjustments, increase in some cost areas in order to capitalize on this opportunity.

Similarly, you can see the company's return on invested capital collapsing. It reached a high as as high as 45% and it's now down to just 1.77%. So, revenue is booming, demand is accelerating, no question about that, but can Palo Alto Networks deliver on these demands from its customers while also improving profitability and profit margins?

I think it's reasonable to assume that over the next few years its margins can recover. These costs are short-term in nature, adjusting to the changing needs of its customers, making some bolt-on acquisitions, etc.

But in the near term, the margins are under pressure. So, Palo Alto stock has soared in 2026. It's up significantly and I was happy about that.

Remember to begin 2026, I ranked Palo Alto Networks stock as a buying opportunity. I've had the stock ranked as a buy for several years.

Right now, Palo Alto Networks valuation is a forward PE of 68.6, which to me seems a little bit expensive because the margins are coming downwards, right? We looked at the operating profit margin, we looked at the return on invested capital.

Those have been trending downward and they're not at very good levels to begin with.

So, for a company that's trading at a forward PE of 68, sure the company has several good characteristics, accelerating revenue growth, backlog is surging, management's forecasts are accelerating, free cash flow margin expected to reach 40% by fiscal 2028.

Those are remarkable figures, but as it stands right now, it doesn't look like a business that should be trading at a forward PE close to 70.

So, I also updated my discounted cash flow valuation for Palo Alto Networks. I revised higher the amount of free cash flow I expect this business will generate by about 250 million per year starting next year.

And that had the impact of increasing the intrinsic value per share, but it's still well below the current market price at 175 of my fair value. The current market price is 335.

So, it looks rich whether I look at it on a discounted cash flow basis or whether I look at it on the market multiple basis. Palo Alto Networks stock looks rich now after the significant increase this year.

So, I mentioned I've had the stock ranked as a buying opportunity for most of the year. On August 7th, 2026, I downgraded it to a hold. And today, I will reiterate that hold rating.

I think the valuation has gotten rich and ahead of itself. I'll wait for a better opportunity to buy Palo Alto Networks stock.