Cyber security comparison update

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Just posted this on a few of the premium stock boards and know there is interest so I am posting here as well.

Now that Sentinel released earnings last night I thought I would update my quarterly Cloud Cyber security comparisons again. This time I will again look at PANW, S, and CRWD as the leaders in this space. As I have often said, PANW can sometimes tend to get overlooked in this space because of the large Firewalled cyber security business they have (that is doing very nicely by the way). But I think that is finally changing.

As usual, for this post I will center on the Cloud Cyber Security space as this is the most exciting in terms of growth and future potential and is largely a SAAS type business which has a lot of aspects that can be extremely beneficial to a stock investor, ie repeat business, stickiness to the customer, extremely high gross margins, etc.

I will also point out that there are other interesting companies that I could include but because I don’t want to make this too confusing nor compare apples to oranges, so I am not including Fortinent, Zscaler, Okta or others that could be argued should be included. If the interest is there I can (or someone can offer to augment this with a follow on post!)

With that out of the way, I first will repeat the last three quarter’s comparison of a couple of key aspects, cloud ARR (Annual Recurring Revenue) and said growth rate. The first is important to show overall size of the cloud portion of the business and the second to show how it is growing. Then I will share the most recent quarters results. Here is the December ‘22 quarter for all three…

Company ARR ($M) % increase(yr/yr)
S………………549……………92%.
PANW……… 2,330…………. 63%
CRWD………2,560……………48%

And the recent March Qtr:

Company ARR ($M) % increase(yr/yr)
S……………….563.6……. ……75%
PANW……… 2,570……………60%
CRWD……….2,730……………42%

And the June / July Qtr results:

Company ARR ($M) % increase(yr/yr)
S……………….612.2……………47%
PANW……… 2,950…………….56%
CRWD……….2,930…………….37%

And Now the Sept/Oct Qtr report:

Company ARR ($M) % increase(yr/yr)
S……………….664………………43%
PANW……… 3,230………………53%
CRWD……….3,150…………….35%

A few things stand out to me here. One, if we compare this quarter to last we see that the recent reduction in growth rates has really leveled off in the industry as all three still dropped a little but not much for any of them and still very nice numbers for all three. Also it is clear to me now that PANW’s cloud ARR is winning between all. Where last quarter CRWD and PANW were almost identical in size, PANW both continued to lead in growth rate and the absolute ARR is now moving ahead. Any advantage to CRWD as first mover in the space seems to be gone (I am open to debate)

As for S, clearly the growth is still very good, but it is below PANW and and a much smaller scale and it is hard to see them catching CRWD with shrinking growth rates and a long growth path to get to CRWD’s ARR level. Based on this, I am not really interested in buying them here even though on its own, the numbers are pretty darn nice. It is no wonder they are looking at potential buyers.

Now let’s look at Free cash flow, S is still negative which is not surprising due to their size, but improving quickly as free cash flow margin went from negative 56% last year versus negative 16% in this quarter. CRWD is actually starting to do quite well showing $239 M in free cash flow, but PANW garnered $ 1,489M, much higher.

To be fair, part of the free cash flow advantage to PANW seems to be because of both their sister Firewalled Cyber security business and Q1 seasonal as it increased from $388 last quarter but only (only?) 20% from last years first quarter $1.20B.

But really, the sister, firewalled security potion is an advantage in my opinion. They have many built in existing firewall customers to add cloud services without relying solely on new customers and as the entire industry matures, I have to believe that having both sides of the business helps to retain customers as you wouldn’t necessarily want to use two different companies for different aspects of the same business need. In fact, that is what they have been saying, selling the fact that they have a complete platform to support all of your Cyber security needs.

In any event, as I have said for quite some time now, it seems to me that PANW is winning this race for customers in a land and expand market and they are my favorite in this space.

To be clear, I like all three (S much less so) and think it is a vital industry that is likely to keep growing in the future. There will likely be more than one winner and even if all don’t stay separate, consolidation won’t be necessarily bad for the ones bought out.

And to be transparent here, I hold a good position in PANW and a smaller position in CRWD.

Having said all that, my biggest concern with the space is still how much market share the gorilla Microsoft can grab as they enter the fray. Like Amazon or Google, It is hard to ignore them in any venture they focus on but at the moment there seems to be enough business to go around. 50%+ in the last two quarters of VERY PROFITABLE ARR growth for PANW is certainly something I could live with for a long time.

What are your thoughts?
Randy

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For anyone wanting to make comparisons with ZScaler - whilst they don’t list out their ARR each quarter they do comment on it…

ZScaler reached $1bn ARR with their November release in 2021 and in their September earnings release reached $2bn ARR growing at 43% (so doubling their ARR in 7 quarters). ZScaler are also very vocal about the ambition to reach the next milestone of $5bn ARR.

FWIW - I believe ~98% of revenues are subscription/recurring based.

Ant
(I hold Crowdstrike (10%) and ZScaler (4%) and Sentinel One (2%) plus Cloudflare (4%) but remain impressed with Palo Alto. Most likely to trim Crowdstrike on relative performance and valuation basis. I also feel Crowdstrike whist performing very well neither has the growth advantage of Sentinel One or ZScaler nor the platform advantage of Palo Alto).

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My only comment to the OP is your completely ignoring valuation. These 3 companies are at very different parts of their lifecycle and after recently trimming CRWD due to valuation, I re-added S at a small 2% because of valuation. Ialso own PANW. They all seem like good bets to me, but for different reasons. By the way, I believe that it was only a rumor that sentinel one was looking for a buyout.

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Thanks MFChips, that is fair, I didn’t look at value this time but have done so in the past.

Of course sometimes this is easier said than done since different metrics make sense for companies in different phases of their life cycle. For instance earnings and cash flow make little sense because the younger companies (S) aren’t even making money yet so comparisons are not even possible.

But I’ll take a shot, let’s look at revenue and ARR and I’ll do it in order of size.

Company…Mkt Cap……qtrly rev……latest ARR
S…………………6.7 B…………164 M………664 M
CRWD……….57.1 B………786 M………3150 M
PANW……….92.0 B……1,880 M………3230 M

It’s more difficult to make the comparisons, let’s start with S vs CRWD. Market cap is 8.5 times as big but revenue is only 5 times as big. And I guess the tough part is how do you scale this for size. Clearly bigger is better (in my mind) and the ratio shouldn’t be the same. It seems to me that it is totally dependent upon where you believe future growth is going because as S grows (if it continues to grow) it should move into CRWDs valuation ratio. But if you believe CRWD has a first mover advantage and will level off at a much higher ARR than S, then the premium you are paying could be justified.

So now to complicate even further, let’s compare CRWD and PANW. I used both total revenues and ARR here because we are comparing a cloud based CRWD with a hybrid fire walled system/cloud based PANW.

To do it properly, you would need to make an estimate of the market cap due to the cloud revenue portion of PANW with its higher growth rate and then subtract that out from the total market cap. This would give a rough estimate of the market cap attributed to the slower growing firewalled portion and see if this is reasonable, cheap, or expensive.

I thought about taking a shot at this but am very concerned with trying to get too fine with the calculations and miss the big picture. In addition, this would ignore any benefit of combination of the two parts of the company which I think is significant.

Anyway, there you have it. I do agree that understanding market cap is important. In this case I am not sure I found anything that makes we lean significantly in one way or another except PANW still looks attractive.

Thoughts?
Randy
Long CRWD & PANW, and PANW tickerguide

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You are right that it is difficult, and I would even say impossible, to try to make those comparisons. I’m simply stating that readers should not take your OP and surmise that Palo Alto is in anyway a better investment as it is comparing only part of the variables. At this time I happened to own all three in fairly equal weighting along with Zscaler.

I’d recommend Jamin Ball’s work where he provides many of these metrics weekly that show things like valuation vs NTM FCF or vs Rev growth, etc.

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