Analysis of Palo Alto Network’s Protect AI Acquisition

The global AI cybersecurity market is expected to grow from $25.4 billion in 2024 to $31.4 billion this year, at 24% CAGR from 2025 to 2034. Yesterday, Palo Alto Networks (NYSE: PANW) announced mixed quarterly results that did not please the market. The stock fell 4% in the after hours trading session. 

Palo Alto Network’s Financials

Its third quarter revenue grew 15% to $2.29 billion, ahead of the Street’s estimate of $2.28 billion. Non GAAP EPS of $0.80 was also ahead of the market’s expectations of $0.79 per share. But it’s adjusted gross margin came in at 76%, falling short of the market’s expected 77.2% for the quarter.

By segment, Product revenue grew 15.7% to $452.7 million and Subscription and Support revenue improved 15.7% from $1.59 billion to $1.84 billion.

For the fourth quarter, Palo Alto Networks expects revenue of $2.49-$2.51 billion and an EPS of $0.87-$0.89 compared with the market’s estimated $0.86 per share. The company expects revenue of $9.17-$9.19 billion and an EPS of $3.26-$3.28 for the year. 

Palo Alto Networks’ Enterprise AI Focus

Earlier last month, Palo Alto announced the release of Prisma AIRS, an AI security platform that has been built to protect the entire enterprise AI ecosystem including apps, agents, models, and data. As organizations are accelerating the deployment of AI tools, Palo Alto sees the need to deploy security solutions across the ecosystem. Prisma AIRS comes with features such as AI model scanning that will enable safe adoption of AI models by scanning them for vulnerabilities, posture management that will help organizations gain insight into security posture risks associated with their AI ecosystem, AI Red Teaming to help identify potential exposure and risks, runtime security to project LLM-powered AI apps, models and data against runtime threats, and AI agent security to secure agents including those built on no-code/low-code platforms.

Palo Alto Networks’ Acquisition of Protect AI

Last month, Palo Alto Networks also announced plans to acquire Seattle-based cyber security solutions provider, Protect AI, for an undisclosed sum. Founded in 2022 by former engineering leaders at Amazon and Oracle, Protect AI helps companies monitor the various layers and components of AI models and machine learning systems. Its offerings focus on AI security posture management with the intention of providing improved visibility, management, and remediation capabilities for AI/ML environments. 

Prior to the acquisition, Protect AI was privately held and had raised $108.5 million from investors including Evolution Equity Partners, Salesforce Ventures, boldstart, Knollwood, and Pellion. An August 2024 Series B round for $60M led by Evolution Equity Partners had valued Protect AI at $400 million.

Protect AI does not disclose its detailed financials. As part of the acquisition, Protect AI’s offerings will be integrated into join Palo Alto Networks’ existing AI security bets to help the customers with greater visibility into the gen AI ecosystem, improve their ability to spot LLM flaws, prioritize misconfiguration risks, and reduce the risk of data exposure and compliance violations. The acquisition will help Palo Alto accelerate the adoption and deployment of Prisma AIRS to address AI security concerns at an enterprise level.

Palo Alto Networks’ stock is trading at $194.48 with a market capitalization of $128.8 billion. It was trading at a 52-week low of $142.01 in August last year and a 52-week high of $208.39 in February this year.

Disclosure: All investors should make their own assessments based on their own research, informed interpretations, and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article. I am an investor in this company.