Cisco Systems (CSCO) and Palo Alto Networks (PANW) are regaining momentum in the second half of this year, as cybersecurity stocks rise. While Cisco, a mature company, seeks growth—particularly through its acquisition of Splunk—Palo Alto Networks is still positioned to reach its full growth potential. A closer analysis using the TipRanks Stock Comparison Tool shows a bullish outlook for both companies. However, past performance and future estimates suggest that Palo Alto may be the superior investment, without necessarily posing significantly greater risk.
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Why Compare CSCO and PANW?
As I maintain a bullish stance on both Cisco and Palo Alto Networks, it’s interesting to highlight why both stocks deserve attention this year.
Both companies have benefited significantly from the rise of artificial intelligence, as cybersecurity becomes even more critical amid the evolving threat landscape. With the explosion of digital data, the rapid expansion of connected devices, and the ongoing shift to cloud computing, organizations are facing an increasingly complex set of cyber threats.
Starting with Cisco, a global leader in networking hardware and software, the company has been rapidly expanding its cybersecurity presence, particularly after its acquisition of Splunk. This acquisition has strengthened Cisco’s cybersecurity portfolio by adding advanced data analytics, security information capabilities, and cloud security solutions. As a result, Cisco is now better positioned to offer a comprehensive infrastructure of integrated products, blending networking and security to scale its offerings.
On the other hand, Palo Alto Networks is a more focused pure-play cybersecurity company. It provides a robust suite of solutions designed to protect organizations from cyber threats. Palo Alto offers an integrated, relatively low-cost approach to security across network, cloud, and operational security. By consolidating multiple security tools into a unified platform, it simplifies security management for customers, improving operational efficiency. This platform approach allows Palo Alto to meet a wide range of cybersecurity needs, making it a key player in delivering a comprehensive, scalable solution for businesses.
Key Differences Between CSCO and PANW
Much of Cisco’s bullish thesis is based on its positioning as a traditional value stock, characterized by a moderate growth rate, a diversified and mature business, and defensive characteristics (evidenced by a low beta of 0.74). This makes Cisco an appealing option for investors seeking stability, dividends (currently yielding 2.7%), and predictable returns.
Cisco boasts strong gross margins of 65% and operating margins of 22%, which position it well compared to the industry averages of 50% and 5.5%, respectively. Despite its market leadership and stable operations, Cisco’s revenue and operating income growth over the past three years have been weak, with CAGRs of 1.4% and -5.9%, respectively. As a result, the stock has gained only 13% over the past three years, while the S&P 500 (SPX) has risen by about 36% during the same period.
In contrast, Palo Alto Networks’ bullish thesis is built on its appeal as a growth stock (with a relatively high beta of 1.14) and its strong growth potential. While primarily a high-growth company, PANW also exhibits some defensive characteristics, thanks to its subscription-based model, stable cash flows, 74% gross margins (though 11% operating margins), and long-term growth drivers, particularly in the expanding global cybersecurity market. Over the past three years, PANW’s stock has appreciated by around 150%, driven by a CAGR of 22% in revenue.
Future Prospects and Valuation Comparison
Although there are clear differences in the investment theses for Cisco and Palo Alto Networks, particularly between value and growth stocks, when we adjust future estimates to the current valuations, the outlook appears more favorable for Palo Alto.
Analysts project Cisco will grow its EPS at a CAGR of 4.2% over the next three to five years. Even considering its lower-risk forward P/E ratio of 16x, this results in a PEG ratio of 3.75x, which is far from cheap. In contrast, Palo Alto Networks is expected to grow its EPS at a CAGR of 22% over the same period. Despite its high forward P/E ratio of 62x, the company’s PEG ratio stands at 2.85x, significantly lower than Cisco’s, suggesting a more attractive valuation relative to growth.
Historical Performance and Risk-Reward Analysis
As I remain confident that the long-term outlook for both Cisco and Palo Alto Networks still seems more positive than negative, their performance over the last decade reveals a significant difference in returns. Let’s assume that an investor had invested $10,000 in Cisco in January 2015. By early December of this year, that investment would have grown to $29,113, representing a cumulative return of 191.13%. In contrast, if the same amount was invested in Palo Alto Networks over the same period, the value would have grown to $94,922, reflecting a cumulative return of 849.22%.
What’s particularly interesting is that despite the large difference in returns, Palo Alto investors didn’t necessarily expose themselves to greater risk than Cisco investors. Over this period, Cisco’s maximum drawdown was 35.5%, while Palo Alto’s was 42.1%, a relatively small difference. Additionally, the Sharpe ratio for Cisco was 0.50, while for Palo Alto, it was 0.77.
In other words, Cisco’s modest Sharpe ratio indicates that while the company provided a good return, it did not deliver enough return relative to the level of risk involved. This result is typical of a more mature company like Cisco, which has relatively high volatility but stable growth. On the other hand, Palo Alto’s Sharpe ratio indicates a better risk-adjusted return, meaning that despite the higher volatility (with a 42.13% drawdown), the company’s substantial returns made the risk more effectively compensated.
Is CSCO a Good Buy, According to Analysts?
At TipRanks, analysts have a somewhat divided consensus on CSCO, with seven out of 14 analysts being bullish and the other seven neutral. The average price target is $63.07, implying an upside potential of 7.2%.
Is PANW a Good Buy, According to Analysts?
Although the Wall Street consensus for PANW is more optimistic, with 31 out of 36 analysts being bullish, four neutral, and only one bearish, the upside potential isn’t greater than Cisco’s. The average price target for Palo Alto is $424.50, implying an upside of about 6% from the current share price.
Final Remarks
In the last six months, both Cisco and Palo Alto Networks have shown strong bullish momentum, driven by the rapid expansion of AI, which is fueling increased demand for their solutions, especially in cybersecurity. However, despite operating in related markets, Cisco and Palo Alto offer different value propositions and have distinct characteristics.
If past performance serves as any indication and future projections align, I believe Palo Alto Networks is the more attractive investment at the moment. It offers significantly greater upside potential, with a historical risk-return ratio that is not necessarily much higher than Cisco’s.
