palo alto networks (NASDAQ:PANW) and cloud strike (NASDAQ:CRWD) are two of the hottest cybersecurity stocks on the market. Palo Alto is one of the world's largest cybersecurity companies, offering a wide range of next-generation firewalls, network security services, cloud-based security tools, and artificial intelligence (AI)-powered threat detection tools. CrowdStrike only provides cloud-native cybersecurity services, not on-site appliances.
Over the past 12 months, Palo Alto stock has risen nearly 50%, and CrowdStrike stock has soared nearly 150%. Let's take a look at why CrowdStrike outperformed its leading competitors by such a large margin and whether CrowdStrike continues to be the better cybersecurity strategy going forward.
Palo Alto Networks is bracing for a near-term economic slowdown
Palo Alto Networks divides its business into three ecosystems. Strata houses older on-premises network security tools. Prisma provides cloud-based services. and Cortex, an AI-powered threat detection tool.
The company's total revenue grew 29% in fiscal year 2022 (ending July 2022) and 25% in fiscal year 2023. Most of that growth was driven by Prisma and Cortex, which the company collectively refers to as its next-generation security (NGS) services.
However, the City of Palo Alto expects sales to increase by only 15% to 16% in fiscal 2024. Analysts currently expect the company's sales to grow 16% for the full year and 14% in fiscal 2025. The slowdown was driven by macro headwinds that made it difficult to attract new customers and competition from other cybersecurity companies.
To combat this slowdown, Palo Alto is consolidating its customers onto a single unified platform and eliminating dependence on smaller cybersecurity firms for certain services. While this strategy could increase the stability of the company's ecosystem, it is driven by trials and revenue deferred agreements and will not increase near-term billings. However, analysts still expect adjusted earnings per share (EPS) to increase 24% in fiscal 2024 and 12% in fiscal 2025 as other expenses are reined in.
The slowdown wasn't catastrophic, but it spooked investors who had expected Palo Alto to resist macroeconomic and competitive headwinds. On the bright side, the company expects its annual recurring revenue (ARR) from NGS services to increase to $15 billion by FY2030 due to platform integration. 4 times more expensive This exceeds NGS ARR of $3.5 billion at the end of the second quarter of fiscal 2024. The company has also maintained a surplus for seven consecutive quarters on a generally accepted accounting principles (GAAP) basis, and is expected to remain profitable for the time being. .
CrowdStrike expects near-term challenges to decrease
Falcon, CrowdStrike's cloud-native cybersecurity platform, eliminates the need for on-site appliances. On-site appliances took up a lot of space, required regular maintenance, and were expensive to scale as your organization grew. This streamlined approach has helped disrupt older cybersecurity companies like Palo Alto.
CrowdStrike's revenue increased by 66% in fiscal 2022 (ending January 2022), 54% in fiscal 2023, and 36% in fiscal 2024. Similar to Palo Alto, it experienced a slowdown as macro headwinds reduced net new ARR throughout the first half. However, new net ARR growth turned positive in the second half of FY24.
This recovery was driven by increased market share, growth across the government sector, and expansion of our Extended Detection and Response (XDR) platform with new generative AI capabilities. We are also strengthening cross-selling of Falcon's services. 43% of customers have adopted at least 6 cloud-based modules (up from his 4 modules initially) – 39% of customers at the end of 2023.
CrowdStrike expects fiscal 2025 sales to increase between 28% and 31%. This will still be a slowdown from FY2024, but it will be much milder than the slowdown in Palo Alto. “While businesses may be tired of dealing with other vendors, they have embraced CrowdStrike's platform strategy and are excited about the Falcon platform,” said Bart Podbele, chief financial officer, on the latest conference call. We hope to make further acquisitions.” The statement appears to be a direct response to CEO Nikesh Arora's remarks on Palo Alto's most recent conference call that some customers are “facing spending fatigue in cybersecurity.”
Analysts expect CrowdStrike's revenue to grow 30% in fiscal 2025 and 27% in fiscal 2026, still growing faster than Palo Alto. They expect adjusted EPS to increase 27% in fiscal 2025 and 25% in fiscal 2026. The company also has four consecutive quarters of GAAP earnings and expects that streak to continue.
Better Buy: CrowdStrike
Neither of these stocks are cheap at the moment. Palo Alto Networks' forward P/E ratio is 55 times, but CrowdStrike's forward P/E ratio is 83 times, which looks even more expensive. However, I own both stocks because I believe they are a “best of breed” in the rapidly growing cybersecurity market.
That being said, I believe CrowdStrike is a better buy than Palo Alto at this point. Its technology is more disruptive, it's growing faster, and it doesn't seem to face as much competitive pressure or “spending fatigue.” These strengths justify the company's higher valuation and should help it outperform Palo Alto Networks over the next 12 months.
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Leo Sun has positions in CrowdStrike and Palo Alto Networks. The Motley Fool has a position in and recommends CrowdStrike and Palo Alto Networks. The Motley Fool has a disclosure policy.
Better Cybersecurity Stocks: Palo Alto Networks vs. CrowdStrike was originally published by The Motley Fool.
