I posted this on the specific stock pages a couple days ago and thought it would gather some interest here as well. Here you go, but remember, it’s a little focused on PANW since I am Tickerguide for that stock….
It’s time again for my scintillating quarterly update on cyber security stocks!! I am once again looking at PANW, S, CRWD, and ZS. As usual, I will center on the Cloud Cyber Security space as this is the most exciting in terms of growth and future potential and is the easiest to compare across the companies. Also, because PANW has a large traditional firewalled business, that is separated out for this post’s purposes (as I have always done). Clearly this assumption and how to account for it is open to debate and disagreement, but I just do the best I can. So be it.
I will also point out that there are other interesting companies that I could include but because I don’t want to make this too confusing nor compare apples to oranges, so I am not including Fortinent, Okta or others that it could be argued should be included. If the interest is there I can (or someone can offer to augment this with a follow on post!)
In the past I have said I would take a shot at looking at separating out the firewall portion of PANW in a follow on post. But when I have tried to do so, it became quite complicated as they don’t do a good job of separating out the revenues, etc for that business and trying to estimate the value of either the cloud or firewalled sides became so subject to interpretation that have not tried for a while. I guess it is a subject left the the reader as they used to say in college texts. I may still try but in an interview on Cramer last quarter, PANW’s CEO said that the traditional firewalled business continues to grow at 5-7%. As last quarter, I think I will leave it at that for now.
With that out of the way, I first will repeat the last four quarter’s comparison of a couple of key aspects, cloud ARR (Annual Recurring Revenue) and said growth rate. The first is important to show overall size of the cloud portion of the business and the second to show how it is growing. Then I will share the most recent quarters results.
The year end 2023 quarter for each and adding ZS into the mix.
Company ARR ($M) % increase(yr/yr)
S……………….734………………37%
PANW……… 3,490…………….50%
CRWD……….3,440…………….34%
ZS …………….2,100………….…35%
March 2024 quarter results
Company ARR ($M) % increase(yr/yr)
S………….…….762………………35%
PANW……… 3,790…………….47%
CRWD……….3,650…………….33%
ZS …………….2,212………….…32%
June/July 2024 results
Company ARR ($M) % increase(yr/yr)
S………….…….806…………….32%
PANW……… 4,220………….….43%
CRWD……….3,860…………….32%
ZS …………….2,372………….…30%
Sept/Oct 2024 results
Company ARR ($M) % increase(yr/yr)
S………….…….860………………29%
PANW……… 4,500………….….40%
CRWD……….4,020………………27%
ZS …………….2,512………….….26%
Finally, the most recent q4 20204 results
Company ARR ($M) % increase(yr/yr)
S………….…….920………………27%
PANW……… 4,800………….….37%
CRWD……….4,240………..……24%
ZS ………..….2,700.………….….23%
Note: For ZS, typically I estimated ARR by multiplying revenues by 4 to get an annual number. But this time Anthonyms pointed out it was given so I have edited to be correct.
Almost identical to last quarters commentary, the total consistency of the industry. The growth rates are high but dropping for all 4 but only a few percent for each quarter which totally makes sense as the rule of large numbers takes over and more and more companies convert to the cloud and data centers. Looking at PANW specifically the last 5 quarters year over year growth rates were: 50 47 43 40 and 37. Amazingly consistent.
Similar to last quarter, I will say it seems like an interesting decision by PANW to announce changes in their sales efforts to offer freemium packages to entice customers to buy multiple products a couple quarters ago. As explained by PANW, the margins for customers with multiple products are much better. The fact that they are taking these actions when their results seem to be fine (and incredibly consistent!) is a good sign in my mind. You want a management that is looking forward, not reacting to the past. And now I can say, looking at the results (at least one qtr in) I hasn’t seemed to hurt the cloud based sales at all where they seem to be holding their own (at least!!) against the competition in terms of numbers. I guess we wait a couple more quarters (again) to see further.
As far as economics of the company it is clear that they haven’t gotten any worse at all. Total revenue grew 14%, non-GAAP earnings grew to $0.81 from $0.73 and management maintained 2025 free cash flow margins 37-38%.
So there you have it. The consistent growth is becoming almost monotonous (almost!). And I really have a tough time seeing how the past prevailing theory that PANW is living off its firewalled business alone is valid. Its cloud based ARR is 13% bigger overall and their growth rate is 50% bigger. I certainly don’t know what the future will bring but the combined bigger size and growth rates versus the other three is clear. The only advantage the others have is the pure play cloud business instead of a combined with the much slower firewalled business (which is a fair complaint).
As for PANW, if you are in for the long term, it all seems good as they continue to produce great results and appears to be winning the cloud business which is a land and expand industry at the moment.
Finally, this is a little bit of an embarrassment of riches. All of these companies are in an industry that is doing great and seems to have a bright future because it is hard for me to imagine a world where this doesn’t continue to grow in importance over time.
Me, I own shares in both CRWD and PANW and don’t plan on selling anytime soon.
What are your thoughts?
Randy
PANW Tickerguide and long PANW and CRWD