Palo Alto Networks, Inc. (NASDAQ:PANW) closed at $346.95 on October 19. The stock has returned 104.62% over the last 6 months, compared to an 11.6% return for the Insider Monkey Billionaire Index and 8.7% for the State Street SPDR S&P 500 ETF Trust.
Palo Alto Networks sells security software to large companies, and by most measures it is doing well. Revenue rose 34.50% in its most recent quarter, and the shares have doubled in six months. The reported profit does not look like any of that. The company earned $307 million on revenue of $11.48 billion, and much of the explanation sits in how it pays its staff.
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Why the Cash Looks Nothing Like the Profit:
Share-based compensation and related charges came to $1.71 billion in the last financial year, more than twice what the business made at the operating line. That is issued in stock rather than paid out, so it never leaves as cash.
Strip it out and the business looks entirely different. Operating cash flow reached $4.55 billion across the same year, more than fourteen times the reported profit, and borrowing is negligible at 9.34% of equity.
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Why It Is Still a Cost:
Paying in shares is not free simply because no cash moves. Every share issued to an employee makes each existing share a smaller claim on the company, so the cost lands on the owners rather than on the business.
The scale of it is what makes this one unusual. The charge dwarfs the profit the company reported, which means the owners are funding some of those wages out of their own stake.
Share-based pay is not the full explanation. A swing in other income and a heavier tax charge covered the rest of the distance to the bottom line. So the charge explains the shape of this profit rather than all of its direction.
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Which Number the Price Is Using:
The stock changes hands at 94.34 times what analysts expect next year. That multiple is built on earnings measured after adding the share-based cost back, not on the profit the company actually reported.
So the price depends on which definition a buyer accepts. On the reported figure, the stock is extraordinarily expensive, and on the adjusted one it is merely expensive. Security budgets have been growing quickly. 10 Best Cybersecurity Stocks to Buy in 2026 has the names competing for them.
Conclusion:
This is a good business that reports two very different pictures of itself, and both are accurate. The cash generation is real, the borrowing is light, and the growth is quick for a business of this size. What holds the headline profit down is largely the cost of settling a big share of the wage bill in stock. That cost falls on owners through dilution rather than on the company through cash, and the tax line closed what was left. Watch the share count rather than the earnings line, because that is where this particular cost is actually recorded.
Market Sentiment:
Palo Alto Networks, Inc. was held by 89 hedge funds with a combined stake value of about $5.49 billion at the end of Q2 2026 in the Insider Monkey database. This is up from 87 hedge fund holders in the previous quarter.
While we acknowledge the risk and potential of PANW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than PANW and that has 10,000% upside potential, check out our report about this cheapest AI stock.
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This article is originally published at Insider Monkey.
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