By Jacob Sonenshine

When the market overreacts, buying opportunities have a way of presenting themselves. That's the case for Palo Alto Networks, whose stock tumbled after it agreed to buy CyberArk Software for $25 billion. It's set to report earnings on Aug. 18.

Everything had been looking great for the cybersecurity company, which was trading near a 52-week high when it announced the CyberArk deal on July 30. And then it looked anything but. Shares of Palo Alto fell 5 % the day the deal was announced and kept on falling -- they're now down 15%, to $165.90, as cybersecurity rival Fortinet saw its stock tumble after reporting earnings on Thursday. Most of Palo Alto's drop, though, is because of the deal's cost: Palo Alto, which expects it to close during the second half of 2026, is financing the acquisition with $2.5 billion in cash and a whole lot of stock issuance.

Acquiring companies often see their stocks take a hit on news of a deal, especially if they're using stock to make the acquisition. Palo Alto is issuing more than 100 million shares, lifting its share count to 785 million and reducing per-share earnings by 13.5%. The fact that it's almost equal to the stock's drop suggests investors priced in the equity dilution immediately.

Palo Alto, however, expects an immediate earnings boost upon closing. Analysts expect CyberArk's second-quarter 2026 adjusted net income to hit $142 million, according to FactSet, which would lift Palo Alto's second-half 2026 net income by just over 10%, to $1.5 billion. By that math, Palo Alto stock should have dropped by just a few percentage points. The fact that it fell so much more suggests that the market is pessimistic about the deal, or is uncertain about the synergies -- Wall Street jargon for the cost savings produced by removing all overlapping expenses, including employees, but also the boost that comes from adding new products to sell to current clients.

Mizuho Securities analyst Gregg Moskowitz believes the market got it wrong. With the deal, Palo Alto is entering identity security, or software that helps entities protect their user data. That's where the revenue synergies come in: The company will be able to cross-sell more products that complement each other to its tens of thousands of customers. Moskowitz points out this could boost Palo Alto's sales by more than just the amount analysts currently expect out of CyberArk's revenue.

"The allure of CyberArk to Palo Alto is clear," writes Moskowitz, who calls the transaction "highly synergistic."

And the synergies aren't just on the product side. BTIG analyst Gray Powell notes that cost synergies are likely, too. He estimates that eliminating redundant costs will boost the combined company's operating profit margin to over 32% by 2028, from just under 28% in 2026, as Palo Alto gradually integrates its new asset into its business.

If they're right, Palo Alto could get an earnings boost of more than 10% -- perhaps a lot more.

That's especially true now that the stock is trading at 46.28 times 12-times forward earnings. That may sound like a hefty number, but cybersecurity is still in high-growth mode, with companies still taking up the new software, and Palo Alto is positioning itself well to participate in the growth. It traded at 55 times before the deal announcement and is closer to the low-end of its five-year valuation range, near 37, than the high end, near 75.

The multiple could inch its way back up, especially if the company beats earnings expectations -- it's expected to report a profit of 89 cents a share on sales of $2.5 billion -- and avoids negative updates on its business or the deal. Palo Alto has a mixed history come earnings time: The company has delivered better-than-expected profits in 13 of the past 20 quarters, but the risks of the deal are already priced in; the rewards aren't.

That should provide a little bit of security for Palo Alto investors.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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(END) Dow Jones Newswires

August 08, 2025 21:30 ET (01:30 GMT)

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