Palo Alto Networks' Organic RPO Decelerates as M&A Masks Growth Slowdown

What happened

Palo Alto Networks reported a Q3 EPS miss driven by share dilution, indicating financial strain from recent acquisitions. Forward guidance for 2H FY2026 relies on M&A to add $1.6 billion to remaining performance obligations (RPO), propping up overall growth metrics. However, organic RPO growth is expected to decelerate from the first half, revealing a normalization in core business expansion amid competitive pressures. This challenges the DeepValue report's investment thesis, which depends on sustained RPO growth toward the FY2026 target of $18.6–$18.7 billion to justify high valuations. While management highlights resilience and Rule of 40 adherence, the deceleration suggests platformization may not be generating organic demand at the anticipated pace.

Implication

The deceleration in organic RPO growth signals potential headwinds in Palo Alto's core platformization strategy, possibly due to market saturation or aggressive competitor bundling. M&A contributions, while boosting short-term metrics, increase execution complexity and dilution, aligning with the DeepValue report's warnings about acquisition integration and margin pressure. This development raises the likelihood of the bear scenario, where RPO falls short of targets and gross margin declines, compressing the current high P/E of 82.6. Investors should monitor upcoming earnings for organic RPO trends and margin stability, as continued slowdown could trigger a valuation reset. Additionally, the lack of quantified updates on Google Cloud Marketplace or CyberArk synergies may further erode confidence in growth drivers beyond acquisitions.

Thesis delta

The news shifts the thesis by highlighting increased reliance on M&A for RPO growth, with organic momentum slowing—this doesn't break the thesis but elevates risks. If organic deceleration persists, it could undermine the platformization narrative and increase dependence on acquisition benefits, which are uncertain and long-dated. Investors should adjust expectations to account for higher probability of the bear case, focusing on near-term RPO reports and margin data as critical checkpoints.