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 $200 Sales based on this year expectations
Finally, here is the most recent results for each…
MOST RECENT QTR
PANW OKTA ZS CRWD Revenues Qtr ($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.