Cyber Security Comparisons

So about a year ago, as the PANW tickerguide, I put together a comparison of the 4 cyber security companies I follow. I thought it might be an interesting to compare them in market cap/size, earnings and sales and the corresponding growth rates. Since many of these stocks are of interest here (and I got a lot of recs! :), I am posting the comparisons here as well.

One quarter ago, I updated these comparisons and I am now updating it here again a year later from the original. I have also decided to add NET to this list as a big part of it’s business is cyber security as well. Every time I have done this, I get a reply or two that says OKTA’s business is different and the comparisons aren’t exact. I am sure I will now get the same discussion on NET but to me, although I agree, it still seems worthwhile as they are all in similar business and all being SAAS type companies. Anyway, it is my post so I can add who I want, Ha ha….

Since I am the tickerguide for PANW, I 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 recognize that the reason for this is both the growth rate and the perceived shift from firewalled systems and hardware to cloud based operations. I am in 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)

**Here was last quarter’s data...**

                        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(sh pr used) 7.8($330) 25($208) 36($167) 34($200)        
Sales based on this year expectations

**And finally the most recent data, 1 year after the first (with NET added)....**

                        PANW        OKTA      ZS      CRWD       NET
Revenues Qtr ($M)      1219.3       303.1    197.1    337.7     152.4
Revenue growth(yr/yr %) 34%         57%      57%     70%        53%
Non-GAAP Net Inc ($/sh)  1.60      -0.11    0.14     0.11     -0.02
Free Cash Flow ($M)  >365M(calc)    -4M       45M     73.6M    -9.8M
Adj FCF Margin          >30%        -1%       23%     22%        6%

Fiscal 2021 or 2022 expectations
Revenue- Mid    ($B)      5.3       1.247    0.945     1.40     0.631
  % growth                24%        49%      40%      53%       46%

Price/Sales(sh pr used) 8.6($470) 31.5($254) 39($270) 34($261)  63($128)     
Sales based on this year expectations

**And now look at price changes…** 

QTR over Qtr              42%        22%       62%      31%       42%
Yr over Yr                84%        20%       99%      134%      119%

Interesting comparison. First off I should say that the forward expectations aren’t exactly perfect as both PANW and ZS just reported their fourth quarters and the other three are on a different calendar schedule and reported second quarters. This is important in that expectations for the 3 second quarter reports are already 50% in the books and are only predicting two quarters out and the other two predicting the entire year.

Second, looking at price changes, the results are amazing for all of them. Even OKTA which has clearly lagged in the last year have had a return I would be happy to get. CRWD is best over the year but ZS was best over the last quarter.

Looking at the business results here from both the absolute values and percentage changes on both a qtr over qtr and year over year basis we also see great results across the board. I will only add a few comments and updates from the previous posts and leave any additional learnings to the reader or follow on posters.

Clearly the big dog here, more revenue than the other 4 combined and more than 3 times bigger than the next nearest competitor (CRWD). They do have significantly lower growth rates, and a corresponding lower enterprise value versus sales although the most recent sales growth actually improved nicely. On the plus size, they have very good earnings (for a SAAS company) and significantly higher free cash flow which gives them the opportunity to continue to improve their offerings to compete in the cloud based space that is the future. The obvious question is whether the others growth rates will slow down before they get to PANW’s size and also whether they compete effectively in that cloud market. More on this later.

OKTA is actually starting to look better. Growth this quarter was good both year over year and quarter over quarter (29%!). Earnings and Free Cash Flow were negative in this most recent quarter and enterprise value over price increased. Both of these probably due to the recent acquisition of Auth0 which seems to be key to continued future growth. Since OKTA seems to have it’s own niche in this market, its hard not to think they have a continued bright future despite the lower recent performance (stock price wise).

ZS has clearly turned a corner her in the last year. Free cash flow is growing rapidly. $9 to $18M (last qtr) to $45M! in the most recent. They are also the smallest of the 4 and highest Ent. Value over price of the four ( I am ignoring the outlier NET which I’ll discuss in a bit). Last quarter I said “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”, but clearly that has changed and they are more comparable to CRWD but it is still tough to pick ZS over CRWD (and you don’t have to!).

The continued clear best of breed here based on my comparisons. Growth rates stand above the others, FCF margins are great but did take a hit this quarter, but still hard to complain. The only question in my mind is whether the numbers will hold up as they grow versus PANW. Which will lead me to talk about size in a bit.

New to this comparison and certainly no slouch. Revenue growth if looked at individually is amazing but actually not as good as some here. The only real concern I have is the Ent. Value over price is significantly above the others. This is partly due to the great price appreciation over the last quarter and year. Perhaps this represents the larger TAM. NET is more than just Cyber security and continues to bundle more offerings to its customers. Perhaps the higher price shows the confidence level in its future growth. Perhaps it is due for a correction back to the rest of the group. I don’t know, but I have a hard time thinking I should sell any of the fairly significant position I have.

As I have done in the previous posts, let’s again talk size. Clearly Palo Alto is the big dog here with more revenue than the other 4 combined. Growth percentage is lower but on a much larger number. The question to ask 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 company, both yr/yr and qtr/qtr

                                       PANW     OKTA     ZS     CRWD   NET
**Absolute Rev increase** (yr/yr)          350M     120M     87M    160M   53M
                   Q/Q                 202M      68M     40M     73M

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 space growth. It seems that the upstarts are definitely catching up but the question is whether they will continue as they get bigger and with PANW’s recent revenue growth increase, this question becomes even more legitimate in my mind. It’s not an obvious thought but if this is really a 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 3 times more new revenue last quarter than any of the others.

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 full switch to cloud services before the others can catch up? Does PANW have an advantage because they can cover both cloud and on-prem systems? I don’t know but since the price/sales ratio is 1/4 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. I think that still applies.

For full disclosure, I own positions in CRWD, OKTA and NET, but this makes me think I should be at least making a purchase in PANW (and maybe ZS) to cover my bases because I don’t know who will win long term.

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 unabated…

PANW Tickerguide. Long CRWD, OKTA, and NET for now.