So for a number of quarters now I have put together a comparison of the 4 cyber security companies I follow. The intent was to compare them in market cap/size, earnings and sales and the corresponding growth rates and based on response it seems like many people are interested so I am updating again for the fall quarters. Since I started I have added a fifth, NET to the list due to the seemingly significant amount of cyber security revenue they get. I also have OTKA here and I understand it is not exactly in the same business. If nothing else you can see how the companies are growing and changing overtime since they all deal with internet security and are all SAAS type companies.
I started this because I am the tickerguide for PANW, and I thought it would be an interesting comparison since Palo Alto had seemed to be on the cheaper end of things compared to some of the newer, smaller companies. I recognize that the reason it is cheaper is because of both the overall growth rates 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. Now that I have done so for a while it seems good to check into progress for each company as well both in price change and business growth.
So, with that, here is the original…
A year ago June qtr…
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 $M) 235M(calc) 29.8M 9.0M 87M
Adj FCF Margin 27% 16% 8% 49%
**Fiscal 2020 expectations**
Revenue- Mid ($B) 3.37 0.775 0.423 0.765
% growth 13% 32% 40% 59%
Mid July ’20 price 245 210 120 104
Price/Sales 6.5 30.1 31.4 26.3
(Based on this year expectations)
**Here was last quarter’s data 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 ($M) >365M(calc) -4M 45M 73.6M -9.8M
Adj FCF Margin >30% -1% 23% 22% 6%
**And the latest quarter…**
PANW OKTA ZS CRWD NET
Revenues Qtr ($M) 1247 351 230 380 172.3
Revenue growth(yr/yr %) 32% 62% 57% 63% 51%
Non-GAAP Net Inc ($/sh) 1.64 -0.07 0.14 0.17 0.00
Free Cash Flow ($M) 555M(calc) 33M 83M 123M -39.7M
Adj FCF Margin 42% 10% 36% 32% -23%
**Fiscal 2021 or 2022 expectations**
Revenue- Mid ($B) 6.7 1.276 1.005 1.43 0.6475
% growth 22% 53% 43% 54% 47%
Price/Sales(sh pr used) 7.9($536) 27($221) 46($330) 33($208) 82($166)
Sales based on this year expectations
**And now look at price changes…**
3 months 16% -16% 20% -25% 37%
1 year 84% 0% 144% 106% 159%
Interesting comparison. First off I should say that the forward expectations aren’t exactly perfect as both PANW and ZS just reported their first quarters and the other three are on a different calendar schedule and reported 3rd quarters. This is important in that expectations for the third quarter reports are already 75% in the books and are only predicting one quarter out and the other two predicting for 3 quarters of the year so P/S are skewed a little by being further out in time and less certain.
Second, looking at price changes, the results are interesting with PANW, ZS, and NET up over the last 3 months, but this is all skewed by the very recent results. Almost all of these have seen significant drops in the last few weeks. PANW is the only one that seems to have kept a fairly consistent upswing having only seen a 2 or 3% reduction in the last few weeks. The others have been hit much harder, but not too surprising in the “risk off” environment where the high flying high growth stocks have had a very quick, very short term pull back. The other interesting fact is that OKTA has been the only one that has not been a good investment over the longer (1 yr) term
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.
PANW:
Still 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 sales growth continues to grow 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 other interesting point is that they now break out the Next Gen Security ARR, which take to be the cloud based security grew by over 70% last quarter. It is only a fraction of total sales but growing rapidly, (1.265B Annual recurring revenue ). 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:
OKTA was starting to look better and growth this quarter was good both year over year and quarter over quarter. 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). But so far this has not played out well including the most recent quarter and market response.
ZS:
ZS has clearly turned a corner here in the last year. Free cash flow is growing rapidly and earnings were positive. They are also the smallest of the 4 and pretty high enterprise value over price ( I am ignoring the outlier NET which I’ll discuss in a bit). Two quarters ago 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. Growth and FCF margins are actually a little better, but much higher EV/Pr. It still seems tough to pick ZS over CRWD at these prices today. (but no reason to not own both!)
CRWD:
Continues to put up great comparisons. It does seem that ZS results are comparable now as they are battling for growth leadership here. ZS a little better but smaller so tough to choose in my mind. The only real question is whether the numbers will hold up as they grow versus PANW for either CRWD or ZS. Which will lead me to talk about size in a bit.
NET:
New to this comparison and certainly no slouch. Revenue growth if looked at individually is great 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 and has gotten significantly more expensive since last quarter. This is continued by the recent price appreciation (and this is after a major pullback recently). 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 an even further 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.
SIZE:
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 and the cloud services are growing rapidly. 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.
PANW OKTA ZS CRWD NET
**Absolute Rev increase** (yr/yr) 301M 133M 87M 147M 58M
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 still had 70% more sales than the next largest.
I know that many have posted that the cloud services are just not as good. But one thought I have had 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?It seems like they are doing well based on the ARR basis. 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. I really don’t know how to value the company when 75% of the company is growing albeit slowly (relative) and 25% is growing quite fast.
Another interesting aspect that comes out recently is that the bigger / better earning company holds up better in market downturns… whatever that is worth (your call here).
Summary
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. Now I really need to include ZS in that same category, 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 considering ZS and PANW, especially if I don’t want to try to pick a winner here (as I am not always the best in doing so.)
Finally, this is certainly a very interesting industry that I don’t think should be ignored despite the recent downdrafts in the stock price of most of them, ie Better buying opportunity since the growth still seems to be there. If you don’t own any of these Cyber security stocks, this might be a great time to start a position.…
Randy
PANW Tickerguide. Long CRWD, OKTA, and NET for now.