It has been a while since all earnings were out so I thought I would do an update on my quarterly Cloud Cyber security comparisons. For this,I will look at PANW, S, and CRWD as the leaders in this space. As I have said before, 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 for this post I will center on the Cloud space as this is the most exciting in terms of growth 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.
With that out of the way, I first will repeat last 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 ($M) % increase(yr/yr)
PANW……… 2,330…………. 63%
And here is the most recent March Qtr:
Company ARR ($M) % increase(yr/yr)
Now it seems like most of the conversation in this industry is either around Sentinel for its high growth or CRWD for its size. But not much around PANW. But it seems that PANW has the best of both worlds.
A couple of quarters ago, it was said that CRW was bigger with equal to or greater growth, but with the most recent results, PANW is both maintaining its growth (with CRWD continuing to drop off, (albeit good growth for any other industry ) and closing in on size. In fact with the numbers above you can see that PANW had a bigger actual increase in ARR, $240M versus $170M quarter over quarter. Think about that. From a lower base, PANW had more sales wins than CRWD. It is really hard for me to understand the logic that CRWD is winning the cloud cybersecurity space.
As for S, clearly the growth is still outstanding, but it is dropping pretty rapidly now and from a much smaller base, 75% versus 92%. And just as importantly, it is also 1/4 the size of PANW, with a growth rate that is dropping pretty fast. It is not surprising that it is dropping, but I am hard pressed to see how they get even close in size to CRWD or PANW with the lead in recurring sales that both have over S.
Now let’s look at Free cash flow, S is still negative which is not surprising due to thier size. CRWD is actually starting to turn this around showing $301 M in free cash flow last quarter, but PANW garnering $401M. These numbers are much closer than last quarter and I believe it has to do with the seasonal effects of the firewalled business more than the cloud security business but is something worth watching.
And to be fair, part of the free cash flow advantage is because of their sister Firewalled Cyber security business. But really, that in inself is an advantage in my opinion. They have built in existing firewall customers to add cloud services without needing 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 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 and think it is a vital industry that is likely to keep growing in the future and there may be more than one winner. But to be open here, I will say I sold out of my small position in S after this last quarter and now hold a good position in PANW and a smaller position in CRWD.
My biggest concern with the space is 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.
What are your thoughts?
PANW Tickerguide and long CRWD, and PANW.