Rapid digitization and the work from home trend amid the pandemic has made users and organizations more vulnerable to cyber-attacks. The demand for cybersecurity solutions, especially cloud-based security, is rising as individuals and enterprises want to protect their information from phishing and malware threats.
Indeed, according to Allied Market Research, the global cybersecurity market is forecast to reach $258.99 billion by 2025, reflecting a compounded annual growth rate or CAGR of 11.9% in the 2018 to 2025 period.
We will analyze the recent performance of Palo Alto and CrowdStrike and use the TipRanks Stock Comparison tool to see which cybersecurity stock offers a more compelling investment opportunity.
Palo Alto Networks (PANW)
Palo Alto is one of the leading names in the cybersecurity market and serves 75,000 customers in more than 150 countries. The company’s transition from its legacy firewall products to cloud cybersecurity solutions and a subscription-based business model has helped in strengthening its position. Palo Alto has three key platforms—Strata (network security platform), Prisma (cloud security solutions) and Cortex (artificial intelligence or AI-based continuous security platform).
Acquisitions have been an integral part of Palo Alto’s growth strategy and have helped in expanding its portfolio and presence in key markets. Last month, the company completed the acquisition of The Crypsis Group, a leading incident response, risk management and digital forensics consulting firm for $265 million. The company believes that Crypsis’ security consulting and forensics capabilities will strengthen its threat intelligence Cortex XDR platform.
Meanwhile, work-from-home tailwinds and continued strength in the next-gen security solutions (which comprises Cortex and Prisma platforms) helped in driving an 18% Y/Y growth in the company’s revenue to $950.4 million in 4Q FY20 (ended July 31). Billings (a key metric indicating future revenue) grew 32% to $1.4 billion in 4Q. For FY20, billings were up 23% to $4.3 billion and deferred revenue rose 32% to $3.8 billion. Adjusted EPS grew 0.7% to $1.48 in 4Q.
Looking ahead, Palo Alto expects the strong momentum to continue with revenue growth estimated between 19% and 20% in 1Q FY21 and in the high teens in FY21.
With Palo Alto’s next-gen billings growing at a CAGR of 97% in the FY18 to FY20 period, the company plans to continue investing in its next-gen security solutions and security subscriptions as part of its transformation.
On Oct 5, BTIG analyst Gray Powell reiterated a Buy rating and $313 price target for Palo Alto as he believes that the Street’s FY21 forecasts are conservative. The analyst explained that an increased mix shift to Next Generation Security (or NGS) and improved performance in attached services on the traditional firewall business should drive billings growth by over 20% y/y pace in FY21 compared to the Street’s estimate of 15%.
The analyst stated “we think investors do not fully appreciate the potential for PANW’s FCF [free cash flow] margins to scale as the company’s NGS business matures over the next few years. As a result, we see multiple catalysts to drive a re-rating in PANW shares over the next 6 – 12 months.” (See PANW stock analysis on TipRanks)
The Street echoes Powell’s bullish sentiment with a Strong Buy consensus based on 21 Buys versus 6 Holds and no Sells. The average analyst price target of $297.81 suggests upside potential of 16.3% in the stock. PANW shares have risen 10.7% year-to-date.
CrowdStrike Holdings (CRWD)
CrowdStrike, which went public in June 2019, has grown rapidly in the cloud cybersecurity space with its AI-powered Falcon platform. Market intelligence firm IDC identified CrowdStrike as the fastest-growing endpoint security software vendor that nearly doubled its market share in the 2018 to 2019 period. Endpoint security focuses on securing various endpoints on a network, including laptops, mobile devices and desktops, from malicious activity.
Last month, CrowdStrike posted better-than-expected results for 2Q FY21 (ended Jul. 31) driven by the work-from-home norm and the accelerated transition to cloud-native technologies by organizations amid the pandemic. The company’s 2Q revenue grew 84% Y/Y to $199 million with subscription revenue rising 89% to $184 million and professional services revenue increasing 40% to $14.7 million.
It also added 969 net new subscription customers in 2Q and ended the period with 7,230 subscription customers, reflecting a 91% Y/Y growth. Strong top-line growth helped the company in delivering adjusted EPS of $0.03 in 2Q FY21 compared to an adjusted loss per share of $0.18 in 2Q FY20. Coming to outlook, CrowdStrike expects 3Q as well as FY21 revenue growth in the range of 68% to 72%.
Last month, CrowdStrike acquired Preempt Security for $96 million. The acquisition will strengthen CrowdStrike’s Falcon platform with Preempt’s conditional access technology and add identity security capabilities to CrowdStrike’s offerings.
On Oct. 5, Goldman Sachs analyst Brian Essex upgraded CrowdStrike to Buy from Hold and boosted the price target to $176 from $122. In a research note to investors, Essex stated that CrowdStrike has established itself as a technology leader in the endpoint security market with a “disruptive platform” that has helped to penetrate core markets with a high level of efficiency.
The analyst sees “room for upside from here,” with the company’s revenue growing at nearly twice the rate of its “hypergrowth” security software peers. (See CRWD stock analysis on TipRanks)
The Street has a Strong Buy consensus for CrowdStrike with 16 Buys, 3 Holds and no Sells. With shares rising by a stellar 196% year-to-date, the average analyst price target of $154.16 indicates a modest upside potential of 4.3% in the months ahead.
Bottom line
Both CrowdStrike and Palo Alto are poised to capture the growing demand for cloud cybersecurity. CrowdStrike’s revenue growth rate is impressive but the YTD rise in the stock does not indicate a significant upside in the near term. Palo Alto stock appears to be a better pick right now.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
