The more than 12% drop in Palo Alto Networks (PANW 0.34%) stock following its disappointing fiscal 2016 Q3 earnings results was a bit of an overreaction, and those who acted on its precipitous share price decline have already been rewarded. Palo Alto hasn't quite recouped the entire 12% lost, but it had clawed its way back to $140.73 a share as of close of trading on June 2.

Even with Palo Alto's stock inching up the last few days, it remains well below analyst expectations, which are nearly all positive. Yes, Palo Alto did receive a couple of analyst downgrades, but its target price remains over 35% above current levels. By comparison, Check Point Software Technologies (CHKP -0.65%) and Fortinet -- two of Palo Alto's peers and primary competitors -- have nowhere near the bullish sentiment from analysts as Palo Alto.

Is Palo Alto investors' more cautious approach merited, or do the majority of analysts have it right that its stock will skyrocket?

Image source: Palo Alto Networks.

What's not to love?

Palo Alto had forecast a 43% to 45% jump in sales last quarter, slightly down from its string of 50% gains or more, but still an awfully sound quarter. Palo Alto's Q3 revenue pleasantly surprised, climbing to $345.8 million, good for a 48% year-over-year improvement.

Palo Alto's quarter also demonstrated that CEO Mark McLaughlin's objective of increasing recurring revenue and inking longer-term deals as measured by deferred sales is seeing success. Its Services unit results jumped a whopping 63% last quarter to $183.7 million and now makes up the majority of Palo Alto's total revenue. Service sales are integral to Palo Alto's plans to build a base of recurring sales, and the division's results demonstrate that the plan is working.

Just three quarters into its fiscal 2016, Palo Alto has already bumped up its deferred revenue by 43%, and free cash flow climbed 95% year over year. Toss in its recent inclusion in Gartner's Magic Quadrant ranking of network firewall providers -- for the fifth time -- and Palo Alto's product and services suite continues to warrant plaudits.

The not-so-good news

Despite its slight beat in revenue guidance, Palo Alto's stock price decline really picked up steam because of its extremely poor guidance. Sales are forecasted to tally $390 million on the high end this quarter, and non-GAAP (excluding one-time items) earnings of $0.50 are expected, barely meeting revised expectations. Palo Alto's 48% revenue jump last quarter was the first time in two years it has reported less than 50%, but at least that was close. This quarter's revenue guidance calls for a paltry 36% to 37% improvement.

With sales rising, albeit considerably slower, why does Palo Alto continue to lose money quarter-in, and quarter-out? In a word, spending. What makes Palo Alto's lack of expense control worrisome is that it's not for infrastructure, research, or development -- often short-term overhead bumps to expand. The primary culprit of Palo Alto's soaring costs is without doubt its sales and marketing.

An eye-popping $202 million, equal to nearly 60% of Palo Alto's total revenue, was spent on sales and marketing last quarter. To put that into perspective, Check Point spent 23% of last quarter's $404.4 million in revenue on its sales and marketing efforts. Another significant difference between Palo Alto and Check Point is that the latter reports consistent profitability on a GAAP basis. It costs money to market and sell products and services, but the relative amount of recurring overhead Palo Alto shells out is jaw-dropping.

Will Palo Alto reach nearly $190 a share, as analysts predict? Eventually. However, the one thing Palo Alto had going for it -- ridiculously high revenue growth rates, which was enough for many investors to overlook its challenges -- no longer exists. Given its spending binge on recurring sales and marketing expenses, don't expect a profitable quarter any time soon. A more cautious approach to Palo Alto is warranted, regardless of what bullish analysts suggest.