Now that earnings are out for the major cyber security players, I figured I would go back and do a quick comparison of their results. As in the past, I am going to look at the three major cloud only players, ZS, CRWD, S as well as the integrated more traditional Firewalled systems and cloud systems player, PANW.
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. I have done this for almost two years now and the feedback I have always gotten is that everything is moving to the cloud and PANW is going to get run over by the cloud only players. It hasn’t really turned out that way so lets look at the numbers.
Lets start simple:
PANW CRWD ZS S
Revenues Qtr ($M) $1,551 $535 $318 $102
Revenue growth (%) 27% 58% 61% 124%
Non-GAAP Net Inc ($/sh) 2.39 0.36 0.25 -0.20
Free Cash Flow (FCF $M) $485 136 76 -66.9
Adj FCF Margin 33% 25% 24% -66%
And to try to put the companies on an even basis, I also look at the Annual Recurring Revenue (ARR). For PANW, they separate out their cloud SAAS service by the name Next Gen Security (NGS).
ARR ($B) $1.89 $2.14 $1.27 0.44
ARR increase (%) 61% 59% 61% 122%
And Finally, lets compare on a Price / Sales basis…
Recent Price $176 $176 $176 $28
diluted share count (M) 299 233 143 281
Market Cap (PRxSh ct, $B) $52.6 41.0 25.2 7.9
Pr/ (qtr Sales x4) 8.5 19.2 19.8 18.0
After you look through the tables a bit you can see many interesting comparisons and both similarities and differences between the four companies. At a high level, it is easy to see how PANW is a different animal. Much higher revenues, earnings and free cash flow along with obviously lower overall growth rates. But the interesting fact is that PANW is growing it’s cloud SAAS software at the same rate as both ZS and CRWD.
S is a bit of a different animal so let’s talk them first. They are growing like mad, but they are losing money very quickly and are much smaller than the other two cloud players. The price/sales is actually cheaper than ZS and CRWD so that makes them interesting to me, but certainly the more risky play. Can they keep growing fast enough and start to increase their margins so that they turn positive in cash flow before the eventual slow down happens? Who knows. For me, it is hard to turn down a 100% plus grower in an industry that is itself expanding rapidly. So I have a position, albeit small one compared to others.
Now let’s look at CRWD and ZS, these seem very similar to me. Similar growth rates, similar earnings and cash flow margins and similar Pr/sales ratio. ZS Sales are only about ? of CRWD, but that is matched by the market cap differences. These two seem pretty similar to me but I like the bigger company since this is a land and expand industry and CRWD’s lead seems beneficial. At the moment, I own quite a bit of CRWD, but do not own any ZS. Looking at this summary, it makes me think I should add some ZS but I have not done so yet.
Now lets look at PANW and compare it to CRWD. The challenge here is to separate out the firewalled portion versus the cloud. I don’t want to call it the hardware portion because that seems to be an unfair description. This is a both hardware and software business that is very sticky and in my opinion, may not be growing as fast but is not going away, and is making a lot of money. Okay, lets try to calculate some numbers.
PANW’s quarterly sales was $1.55B and it’s ARR SAAS portion was $1.89B. Since this is annualized, I have to divide by 4 to get a quarterly SAAS sales of $0.4725B. This is pretty similar but approximately 10% less than CRWD’s ARR. So that leaves $1.07B in the firewall business. In other words, if I theoretically break it into two companies, I get
SAAS Firewalled
Quarterly Sales $.47B $ 1.07B
In an earlier post, someone has tried to do this comparison and gave PANW a significantly lower PR/Sales ratio on the SAAS portion because he believed the sales were lower and because he believed their growth was lower. In fact, Growth is equivalent (slightly higher!) and the price/ sales ratio for both ZS and CRWD are similar even though ZS is a smaller size.
So let’s value the SAAS business at slightly less PR/Sales than CRWD (and even less than ZS for that matter)
So Market Cap of SAAS portion = 1.89 x 19 = $35.9B
Since the entire company is being valued at $52.6B, that leave the Firewalled business at $16.7 Billion and a Pr/Sales ratio of 16.7 / (1.07x4) = 3.9.
Now is that a good price? Not sure, depends on the profitability and growth. Let’s take a shot at that. First growth:
The total growth was 27%, Since the SAAS portion was growing at 61%, that means that the remainder was growing at approximately :
Gr rate: (1.55 x 0.27) - (0.47 x 0.61 )) /1.07 =
( .4185 - .287 ) / 1.07 = 12% growth
And the margins on that sales now can be estimated. If I assume that PANW has the same FCF margins as CRWD, (this is probably low since the established business is better)…
So FCF due to Firewall business =
$485M - (470 x 0.25) = $368M and FCF margins are: 368/ 1.07 = 34.4%
Which is very nice. If I take an estimate on earnings by subtracting out CRWDs per share earnings and recalculating the PE ratio of just the firewalled company I get
$2.39 - (0.36x 1.89/2.14) = $2.07/share but the price per share for the Firewalled company would be:
$176 (1.07/1.55) = $121 and
PE= 2.07/ $121. = 58…. Remember this is PE not PS…. a Big difference.
Not cheap but this is for a company growing in the teens with very large Free Cash Flow margin.
So the real question is whether the incumbent has an advantage in selling SAAS systems. I don’t know the answer. What I do know is that PANWs stock price is actually up from 12 months ago and is down only 15% or so from the high in November. CRWD is down substantially from a year ago and about 40% from its high in November.
If I would have done this analysis a year ago, the firewalled company was almost free.
So my take is if you want to reduce your risk in an incredibly strong and growing industry, PANW would be a good risk reduction. One thing is clear, the SAAS portion of PANW is no slouch when compared to CRWD and the fact that they are clearly making headway in that business should not be overlooked.
Randy
PANW Tickerguide and Long CRWD, PANW, and S.