The Nasdaq Composite index slipped into bear market territory in April, after President Trump imposed tariffs on America's trading partners.
Digital products and services are largely exempt from tariffs, so cybersecurity vendors like CrowdStrike and Palo Alto Networks are mostly unaffected.
Even if the tariffs cause an economic slowdown, businesses are unlikely to cut their cybersecurity spending.
Following President Donald Trump's "Liberation Day" tariff announcement on April 2, the Nasdaq Composite technology index plunged by as much as 24% from its record high, placing it in a technical bear market. The tariffs have immediately increased the price of imported goods from every country in the world, leading investors to fear an economic slowdown might be on the horizon.
But tariffs primarily affect physical products, whereas software and digital services are exempt. That means cybersecurity vendors like CrowdStrike Holdings(NASDAQ: CRWD) and Palo Alto Networks(NASDAQ: PANW) are mostly unaffected. Even if businesses trim their costs in an economic slowdown, cybersecurity spending is probably one of the last things they will cut because of the risks involved.
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Nevertheless, CrowdStrike and Palo Alto have declined by 6% and 14% from their all-time highs, respectively, amid the sell-off in the broader market. Here's why investors might regret not buying the dip.
Image source: Getty Images.
The case for CrowdStrike
The cybersecurity industry has a history of fragmentation, meaning different vendors often specialized in specific products, so businesses had to piece together their security stack from multiple providers. CrowdStrike's flagship Falcon platform is soaring in popularity because it's one of the industry's only true all-in-one solutions, protecting everything from cloud networks to employee identities to endpoints.
Falcon is cloud based, so it's incredibly lightweight, meaning it doesn't bog down computers and devices with cumbersome locally installed software. CrowdStrike also knows it's impractical to expect every business owner or employee to be a cybersecurity expert, so it placed artificial intelligence (AI) at the center of the Falcon platform to ensure threats are detected and neutralized with as much automation as possible.
Falcon features 29 modules (products) for businesses to choose from, so they can customize the platform to suit their specific needs. At the end of the company's fiscal year 2025 (ended Jan. 31), 67% of customers were using at least five modules, which increased from 64% in the prior year.
The company's new Flex subscription, which allows customers to reallocate their spending to different products whenever they like, could drive higher adoption because the average user has experimented with more than nine different modules.
Fiscal 2025 ended with $4.24 billion in annual recurring revenue (ARR), which was a 23% increase from the prior year. The result might have been slightly better if not for the company's global outage in July last year, which delayed several new customer contracts.
However, it appears there won't be any lingering effects on the business, because management reiterated its long-term goal to reach $10 billion in ARR over the next six years, implying 135% growth from its fiscal 2025 result.
CrowdStrike trades at a price-to-sales ratio (P/S) of 26.7, which makes it one of the most expensive stocks in the entire cybersecurity space, even after its recent dip. However, few companies issue such long-term revenue forecasts, so if the company really does grow its ARR by 135% by fiscal 2031, its stock might actually be cheap for investors who can hold on to it for the long term.
Plus, CrowdStrike predicts its addressable market will grow to $250 billion over the next few years, so even $10 billion in ARR would represent a mere fraction of the company's opportunity.
The case for Palo Alto Networks
Palo Alto is the world's biggest pure-play cybersecurity company by market capitalization and by revenue. It offers a suite of products across three platforms: cloud security, network security, and security operations, and it aims to be a one-stop provider for all of its customers, much like CrowdStrike.
Palo Alto is weaving AI into as many of its products as possible. For larger organizations, the Cortex XSIAM platform for security-operations centers can reduce the burden on human cybersecurity managers by autonomously neutralizing incidents. One customer has even experienced a 75% reduction in the number of security events that require manual intervention.
But Palo Alto is also protecting organizations that are using AI. Its new AI Access Security platform is designed to secure the data that employees are plugging into third-party large language models (LLMs) to build custom AI software.
And it scans every third-party tool to verify its safety, and immediately blocks those that pose a threat. This platform will become a crucial part of the cybersecurity stack in the future, because most businesses rely on external providers like OpenAI to bring their AI strategy to life.
Around half of Palo Alto's ARR now comes from its next-generation security (NGS) portfolio, which includes its AI products. NGS ARR came in at $4.8 billion at the end of the fiscal 2025 second quarter (ended Jan. 31), which represented year-over-year growth of 37%. That means it's growing much faster than the company's overall revenue, which increased by just 14% during the quarter.
Palo Alto estimates it can triple its NGS ARR to $15 billion by fiscal 2030, so there is still plenty of potential growth left in the tank.
The stock currently trades at a P/S of 14.8, so it's 44% cheaper than CrowdStrike. Overall revenue is growing slower than CrowdStrike's revenue, which justifies some of the discount.
However, the growth potential of the NGS segment could drive a significant acceleration in the company's top line overall, so I wouldn't be surprised to see its P/S trend higher from here:
Palo Alto stock was trading at a record high in February, so the 14% dip is potentially a great entry point for investors, especially since it was mostly driven by the tariff turmoil, which cybersecurity vendors should navigate better than most companies.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
