Palo Alto Networks(NASDAQ: PANW) and CrowdStrike(NASDAQ: CRWD) are two of the market's most closely followed cybersecurity stocks. Palo Alto is one of the world's largest cybersecurity companies, and it provides a wide range of next-gen firewalls, network security services, cloud-based security tools, and artificial intelligence (AI)-powered threat detection tools. CrowdStrike provides only cloud-native cybersecurity services instead of on-site appliances.
Over the past 12 months, Palo Alto's stock has rallied nearly 50%, while CrowdStrike's stock has soared almost 150%. Let's see why CrowdStrike outperformed its larger peer by such a wide margin -- and whether it will remain the better cybersecurity play.
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Palo Alto Networks is bracing for a near-term slowdown
Palo Alto Networks splits its business into three ecosystems: Strata, which houses its older on-premise network security tools; Prisma, which provides its cloud-based services; and Cortex, which handles its AI-powered threat detection tools.
Its total revenue rose 29% in fiscal 2022 (which ended in July 2022) and 25% in fiscal 2023. Most of that growth was driven by Prisma and Cortex, which it collectively refers to as its next-gen security (NGS) services.
But for fiscal 2024, Palo Alto expects its revenue to increase only 15%-16%. Analysts now expect its revenue to rise 16% for the full year and grow 14% in fiscal 2025. That slowdown was caused by the macro headwinds that made it harder to gain new customers, as well as competition from other cybersecurity companies.
To counter that slowdown, Palo Alto is trying to consolidate its customers onto a single unified platform to eliminate their dependence on smaller cybersecurity companies for specific services. That strategy could increase the stickiness of its ecosystem, but it's being driven by trials and deferred revenue deals, which won't boost its near-term billings. However, analysts still expect its adjusted earnings per share (EPS) to grow 24% in fiscal 2024 and 12% in fiscal 2025 as it reins in its other expenses.
That slowdown wasn't disastrous, but it rattled investors who had expected Palo Alto to resist the macro and competitive headwinds. On the bright side, the company expects the consolidation of its platform to boost its annual recurring revenue (ARR) from its NGS services to $15 billion by fiscal 2030. That would be more than 4 times higher than its $3.5 billion in NGS ARR at the end of the second quarter of fiscal 2024. It's also stayed profitable on a generally accepted accounting principles (GAAP) basis for seven consecutive quarters -- and it expects to stay in the black for the foreseeable future.
CrowdStrike expects fewer near-term challenges
CrowdStrike's cloud-native cybersecurity platform, Falcon, eliminated the need for on-site appliances -- which took up a lot of room, required constant maintenance, and were expensive to scale as an organization expanded. That streamlined approach enabled it to disrupt older cybersecurity companies like Palo Alto.
CrowdStrike's revenue rose 66% in fiscal 2022 (which ended in January 2022), 54% in fiscal 2023, and 36% in fiscal 2024. Like Palo Alto, it suffered a slowdown as the macro headwinds reduced its net new ARR throughout the first half of fiscal 2024. But its net new ARR growth turned positive in the second half of fiscal 2024.
That recovery was driven by its market share gains, its growth across the government sector, and the expansion of its extended detection and response (XDR) platform with new generative AI features. It's also cross-selling more of Falcon's services: 43% of its customers had adopted at least six of its cloud-based modules (up from its starting set of four modules) -- compared to 39% of its customers at the end of fiscal 2023.
CrowdStrike expects its revenue to rise 28%-31% in fiscal 2025. That still represents a deceleration from fiscal 2024, but it's much milder than Palo Alto's slowdown. In its latest conference call, CFO Burt Podbere said, "While companies may be fatigued with other vendors, they have embraced CrowdStrike's platform strategy and want to buy more of the Falcon platform." That statement seemed to be a direct response to Palo Alto's latest conference call in which CEO Nikesh Arora said some of its customers were "facing spending fatigue in cybersecurity."
Analysts expect CrowdStrike's revenue to rise 30% in fiscal 2025 and 27% in fiscal 2026 -- so it's still growing faster than Palo Alto. They expect its adjusted EPS to grow 27% in fiscal 2025 and 25% in fiscal 2026. The company has also been profitable on a GAAP basis for four consecutive quarters and expects that streak to continue.
The better buy: CrowdStrike
Neither of these stocks is cheap right now. Palo Alto Networks trades at 55 times forward earnings, while CrowdStrike looks even pricier at 83 times forward earnings. However, I own both stocks because I believe they're both "best in breed" plays on the booming cybersecurity market.
That said, I believe CrowdStrike is a better buy than Palo Alto right now because its technology is more disruptive, it's growing faster, and doesn't seem to face as much competitive pressure or "spending fatigue." Those strengths justify its 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 positions in and recommends CrowdStrike and Palo Alto Networks. The Motley Fool has a disclosure policy.
