Cyber Security comparisons

As the Tickerguide for PANW, I put together a comparison of cyber security companies last quarter and got enough response that I thought I would update again this quarter and I hope it is of interest here on Saul’s board since a number of these stocks are in multiple portfolios. So here it is…

Last quarter, I put together a comparison of the 4 cyber security
companies I follow. Since earnings are out for all four now, I thought it
would be worthwhile to do a follow up. As a reminder, i looked at comparisons between market
cap/size, earnings and sales and the corresponding growth rates.

I realize these are all different and don’t even do exactly the same functions
but thought it would be an interesting comparison since Palo Alto seems to be
on the cheaper end of things compared to some of the newer, smaller companies. (I know OKTA is a little different than the other 3 but I did it anyway for valuation comparison purposes).

I think this is significant because one of the primary driving forces in this industry is the perceived shift from firewalled systems and hardware to cloud based operations, so to look at growth
rates as time moves on may give an indication on who is winning the land and expand cyber security war.

I think everyone who invests here understands that once a firm in selected it is painful to switch so who is winning the growth story becomes paramount in this arena.

To be clear, I am no way trying to put together any definitive answers but thought the back to
back numbers comparisons might be good. In any event, here is what I had from
last June quarter….


                           PANW       OKTA      ZS      CRWD
Revenues Qtr ($M)          869.4      182.9    110.5    178.1
Billings growth(%)          24%        46%      55%      85%
Non-GAAP Net Inc ($/sh)    1.17      -0.17     0.07     0.02
Free Cash Flow (FCF $M) not given    29.8M     9.0M      87M
Adj FCF Margin             27%        16%      8%       49%

Fiscal 2020 expectations
Revenue- Mid    ($B)       3.37     0.775     0.423     0.765
  % growth                 13%        32%       40%       59%

Price/Sales                6.5       30.1      31.4      26.3     
(Based on this year expectations) 

And here is the March quarter I reported last time

QTR reported 3/21

                               PANW      OKTA      ZS      CRWD
Revenues Qtr ($M)             1016.9     234.7    157.0   264.7   
Billings growth(yr/yr %)        25%       30%      55%     74%     
Non-GAAP Net Inc ($/sh)        1.55      0.11     0.10     0.13
Free Cash Flow ($M)         295M(calc)   32.5M     18M     97.4M 
Adj FCF Margin                  29%       14%      11%     37%     

Fiscal 2021 or 2022 expectations
Revenue- Mid    ($B)            4.175    1.08      636     1.315  
  % growth                       22%      29%      48%      50%

Price/Sales                      7.8      25       36       34
Share price used                 $330    $208      $167     $200        
Sales based on this year expectations 

Finally, here is the most recent results for each…

                               PANW      OKTA      ZS      CRWD
Revenues Qtr ($M)             1074.      251       176.    303   
Billings growth(yr/yr %)        27%       40%      71%      74%     
Non-GAAP Net Inc ($/sh)        1.38      (0.11)   0.15     0.10
Free Cash Flow ($M)         322M(calc)    53M     56M      117M 
Adj FCF Margin                  30%       21%     32%      39%     

Fiscal 2021 or 2022 expectations
Revenue- Mid    ($B)            5.29     1.22     0.662     1.356  
  % growth                       23%      46%      49%      52%

Price/Sales                      6.8      30       45       42
Share price used                 $372    $245      $220     $252        
Sales based on this year expectations 

Interesting comparison. So much to look at here from both the absolute
values from the recent quarter and a relative comparison to how things
have changed since June.

Clearly the big dog here, three times as big as the next biggest (CRWD).
Also, lower growth rates, and much lower enterprise value versus sales. The
obvious question is whether the others will slow down before they get to
PANW’s size. More on this later.

Nothing wrong with OKTA’s numbers but feels like the odd man out here on a
comparison basis but there is a little mud in the water with the auth() acquisition.
FCF and billings growth has returned that makes me feel a little better than last quarter,
second in size but looks to be passed by CRWD shortly. The enterprise value versus sales has a pretty good increase but again, I think that is partly due to the acquisition so it may not be entirely fair until comparisons are apples to apples.

ZS has taken a nice turn since last quarter with growth rates back to very nice levels. But it should be pointed out, they are also the smallest of the 4. With size, growth rates and FCF
margins lower than CRWD and enterprise value higher, it is hard to see a
reason to own them over CRWD. Having said that, the numbers are all pretty
amazing and if not being compared to the other cyber security companies,
I would probably be drooling.

The continued clear best of breed here based on my comparisons. Growth
rates stand above the others (but ZS is getting closer), FCF margins are amazing for a company
growing this fast and solidly above the others. The only question in my mind is whether the
numbers will hold up as they grow versus PANW. Which leads me to talk about size.

And this story hasn’t changed significantly from last quarter. Clearly Palo Alto is the big dog
here with close to 2X of the revenue of the other 3 combined. Growth percentage is lower but
on a much larger number. The question to asked is whether the other companies will catch up
if the growth rates slow as expected due to the effect of large numbers.
One interesting comparison is looking at the absolute quarterly revenue
increase for each (yr/yr )…

                                 PANW     OKTA     ZS     CRWD
Absolute Rev increase (Qtr/Qtr)   57M     16M     19M     38M  
Absolute Rev increase (Yr/Yr)    205M     68M     66M     125M

I find this interesting because despite the smaller growth rate, the amount
of new sales is actually very strong and somewhat hidden when looking at
percentage increases. I guess the big question is whether PANW can use it’s
position to control the cloud growth. It seems that the upstarts are definitely
catching up, especially CRWD, but the question is whether they will continue as they get bigger.
It’s not an obvious thought but if this is really and land and expand process
where you want to get the most customer revenue quickly because it is painful
to switch, then PANW could claim to be winning. They basically had almost as much new
revenue in the last than the other three combined.

One thought I have is that the very best products don’t always win, it is easier
to add a product from your current supplier than to switch suppliers overall.
Will PANW make the switch to cloud services before the others can catch up? I
don’t know but since the price/sales ratio is ? of the others while it is
getting more absolute sales gains certainly makes me think.


The last time I posted this I stated that CRWD is clearly the best of the 3
smaller companies and has huge promise to be eventually the biggest, but I
also said that PANW’s size advantage may actually hold up long term. It does look like CRWD did nothing to make it look like the growth won’t continue at a high level. If you have to pick one stock, CRWD is probably the best bet (only my opinion) but the incumbent can win and seems to be doing just fine.

For full disclosure, I own positions in CRWD and OKTA, but this makes me think
I should be at least making a purchase in PANW to cover my bases.

Finally, what an industry! If you don’t own any of these Cyber security stocks,
I would highly recommend getting into one or more of them. The growth continues

PANW Tickerguide. Long CRWD and OKTA for now.


Awesome post, thank you for sharing!

You had me right up until, “…this makes me think I should be at least making a purchase in PANW to cover my bases.” Why is covering bases more important than growing your dollars? Why wasn’t your comment more like “maybe I should sell OKTA and buy ZS to keep the same number of holdings but back the better business”? Or just, “maybe I should sell OKTA and buy more CRWD or another faster growing company”? I am asking out of curiosity as you follow all of these much closer than I do. Why do you choose to stay with OKTA over ZS specifically?

For transparency, I own CRWD (20% of port) and ZS (5% of port)


PANW has a great product - as long as your company is not physically growing. Protected devices can be up dated, but they only have so much ability to be expanded. As a result, when you reach the end of capacity (ports, etc.) another part has to be physically added to the network.

This will make the expand portion of PANW’s strategy both more painful and more time consuming. It will also be more lumpy and inefficient as shipping, physical supply chain concerns and onsite presence will limit.

For the others, it is only a click away, and, with less effort, and NO additional incremental service or client side hours. Almost pure profit.

As to growth, I think what we are seeing in incremental PANW customer expansion and should be both a proxy for how PANW grows, but also, an excellent indicator for the type of trajectory for these other companies as their services grow with their own customers.

This is not exclusive. We are a ZS, CRWD and PANW shop, now. Although I would not pick this strategy myself, I can see how “legacy” equipment and systems are not removed when newer tech gets purchased and installed.

This is precisely what we have done. How long will we keep a stack of security providers around and sucking revenue for their service? It’s anyone’s guess. In this case, we will continue to have significant overlap between providers until somebody gathers political will and budgetary focus to make a cut.


My cross post to BigECat on another board…

Great post BigECat - thanks for the rich info…

I have held all of these companies in my portfolio previously (and at one time altogether), however I now only hold ZS and Crowdstrike. I sold out of Palo Alto when its growth dropped to the 20-30% level and sold out of Okta recently when its growth rate fell out of bed and it muddied the water with the Auth(1) acquisition (which I think is a great move but masks a tailing off in growth at ex Okta).

For full disclosure, I own positions in CRWD and OKTA, but this makes me think
I should be at least making a purchase in PANW to cover my bases.

I would not - all the metrics apart from valuation are with Crowdstrike and ZS. Palo Alto is a mature player with a mature established revenue portfolio that would be a drag on their new cloud solutions. Crowdstrike and ZS and Okta don’t have that mature slower growing revenue to worry about or cannibalisation to have to perform or a business model change to undertake.

Palo Alto adds large numbers but at a lower % growth rate but as Crowdstrike and ZS grow then they will add larger and larger numbers and eventually overhaul Palo Alto - just as Palo Alto did when it was the smaller fast growing player taking on the much larger Check Point (at the time).

Also most enterprises have multiple vendors not just one so I wouldn’t think it is a barrier to go with Crowdstrike or ZS vs remain with Palo Alto, furthermore if a company is using the traditional Palo Alto solutions and thinking of making a switch to cloud - then that is such a fundamental change then they might as well consider an alternative vendor. The transformation is about the same so it isn’t really an add on advantage for Palo Alto.

BTW ZS and Crowdstrike are also in partnership and selling each other into their clients. That’s again a much stronger chance of success than being the lone player that Palo Alto is.

I can see why you would want to combine Okta with Crowdstrike from a non competing complementary solution provider but from pure RoI I am sticking with ZS (2%) and Crowdstrike (12%) for now. I will reconsider Okta when they are through the other side of their acquisition and we see what the eventual like for like growth profile looks like.



It’s also important to note that, although these companies might be in the same market category as “Cyber Security”, they don’t do the same thing at all. They solve very different problems for a corporation.
I don’t know so much about PANW, but Palo Alto has a challenge in front of them, which it seems they are working through it quite well, which is shifting from an on-premises network security to a cloud network security concept, and still add value to their customer. Another company executing on this well is VMware. They are datacenter powerhouses, which Cisco systems also was, but it’s not shifting to SAAS/Cloud so well. Regardless, their challenge is a 5-year road and I don’t believe in a sustainable high growth in the near term, although I believe on both PANW and VMW on the long run.

Additionally, a comment was made before about redundant products that end up lingering around. It’s true, it really happens. But make no mistake: the legacy product has already been killed when the ROI of the new product was calculated and presented. The legacy product is a dead man walking and all it takes to take it down completely is a crisis, which always forces a company to look at its operation looking for some fat to lose.


Thanks Rafesusername!
Your question, why is covering the bases more important than making money is a good one and comes up on this board many times so I thought I would take a shot at answering even though it goes against the grain here on Saul’s board. Hopefully, it is okay to post…

I have learned a ton from this board and I believe that it has definitely improved my investment philosophy. However, I don’t have enough confidence in my abilities to pick stocks to put all of my investments in a few stocks or push money in and pull money out as rapidly as some.

Even though I am retired, I don’t have the time or inclination to follow stocks so closely as some here. A prime example is Saul’s dumping of Fastly overnight and the next day when earnings came out (which was brilliant by the way!). And I’ll even go farther as to say even if I read the earnings report, I would need to dwell on it a while to determine if the problems are temporary or real. My experience is that when I knee jerk react, I do exactly the wrong thing.

I actually think I am getting better (again, thanks to Saul and this community) but we are talking about my life savings here. So I don’t change rapidly, I buy what I think are great companies with long runways and try to give them a little rope.

I have owned Apple, Amazon, Netflix, and a number of others for years. I sleep very easy at night with my companies. But I will be the first to admit that most years Saul and others will kick my butt. I have to be satisfied with my paltry 40% return last year, ha ha. And I am fine with that.

So onto your question. Based on my study of the companies in the post, I would rank the company most likely to win big long term as Crowdstrike and the lowest risk company as Palo Alto Networks. I think they have a very good chance of being significantly higher in 5 years based on their strong growth, market position, and reasonable market value.

OKTA kind of plays in its own field so their growth rate and value also look attractive due to less risk of competition which is why I own them. I have been reducing OKTA some over time and I have been thinking of adding to Zscaler, but haven’t pulled the trigger. And of course (it was the point of the question) thinking of buying some PANW. I think that owning multiple companies in a great industry is okay.

But to be clear, I am always evaluating and changing totals at the fringes so over time things change as the companies do.

Hope that helps and makes sense. I totally agree that it is different than many here so no explanations of why I shouldn’t own my 15th best idea instead of more of my first. BY the way, I own about 50 stocks… I know sacrilege!! Ha ha

Thanks to all for a great board and hope I added to it (not cluttered it up!)

PS: thanks again Saul, I do believe you have changed lives for those willing to do the work.