Q2 2025 Cybersecurity update

Investment Analysis Clubs Saul’s Investing Discussions
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As usual. I posted my Q2 cybersecurity update on the premium boards a couple of days ago and am posting a copy here now. Thoughts and even disagreement is welcome!

It’s time (maybe past time!) for an 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 add a little discussion on CYBR as it was recently announced that PANW will be acquiring Cyberarc and should be adding to its platform and hopefully increasing revenue growth

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 kind of side stepped how to value the firewalled version of PANW versus Crowdstrike but with the run up in CRWD and PANW’s lessor performance the comparison has been kind of striking so I will attempt at a quick comparison by subtraction as you shall see, but that comes later….

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.

Second Qtr 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%

And the q4 2024 results

Company ARR ($M) % increase(yr/yr)
S………….…….920………………27%
PANW……… 4,800………….….37%
CRWD……….4,240………..……24%
ZS ………..….2,590………….….23%

Company ARR ($M) % increase(yr/yr)
S………….…….948………………24%
PANW…….… 5,100………….….34%
CRWD……….4,440………..……22%
ZS ………..….2,900………….….23%

And finally the most recent quarter for each:

Company ARR ($M) % increase(yr/yr)
S………….……1,000………..……24%
PANW…….… 5,600………….….32%
CRWD……….4,660………..……20%
ZS ………..….3,015……….….….22%

Almost identical to last quarters commentary, is the total consistency of the industry. The growth rates are high but slowly dropping, this time only S holding flat. But I will add is that the drops are actually slowing, this time 0-2% as compared to last quarter’s yr over yr numbers. Looking at PANW specifically the last 5 quarters year over year growth rates were: 43 40 37 34 and 32%. Amazingly consistent(and yes slowly dropping)

Also again, I will say that changes that PaNW made in the sales approach in offering freemium packages to get customers to try their platform approach clearly worked as they continue to grow better than the industry. As explained by PANW, the margins for customers with multiple products are much better. Now in addition to this, they bought CYBR to add to their platform which should add more growth as they grew faster than the rest of the industry at 50% yr over yr ARR (from a $1.22 B base which is not an insignificant 20% of PANWs present size).

I am really starting to wonder why everyone keeps saying they aren’t the leaders here.

As far as economics of the company it is clear that they haven’t gotten any worse at all. Total revenue grew 16% (an increase as cloud based sales continue to grow in terms of the total), with good earnings and significant free cash flow margins.

To be fair, I will say that CRWD said that they expect ARR growth to 40% in the second half of the year. I am not sure what to make of this as it doesn’t appear to show any improvement so far so that would be a big change. I guess we will see…

So, now I will update my comparison in market cap between CRWD and PANW. As of today’s prices CRWD has a market cap of $106 B and PANW’s market cap is $132.1 B. So you are paying a 24% premium for PANW, but PANW’s ARR is 20% greater so essentially the ARR portion of the companies are equivalent and that is with PANW’s growth has been consistently higher, 32% vs 20% this past quarter. So PANW is the much better value and that is before you add back in the very profitable fire walled business.

So I am very comfortable having bigger position in PANW than CRWD. It will be interesting to see how CYBR adds to their story and also how CRWD’s announced increased ARR adds to theirs

But truthfully, in the end, this industry is a little bit of an embarrassment of riches. All of these companies are 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. And if you look at the last 4 quarters for all of them, the growth is really amazingly consistent, event if it is on a very slow descent slope lower.

Me, I own shares in both CRWD and PANW and don’t plan on selling either anytime soon (I do own more of PANW but I am a fairly conservative investor).

What are your thoughts?
Randy
PANW Tickerguide and long PANW and CRWD

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I guess 2 points of interest related to this.

  1. The coming quarters will pass the 1 year anniversary of the Crowdstrike outage after which they had immediate customer acquisition and retention challenges which led them to institute a rebating scheme for customer spend. So the YoY net new ARR and ARR growth compares in a sense get a lot easier for them.

  2. Crowdstrike intend to normalise their charging and end the rebating from this quarter onwards which will be interesting to see whether that makes the competitive landscape advantageous and easier for the competing cloud security players.

Ant

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Hi Ant,
I won’t disagree with you but I will say that the growth rates for the last few years (way before the bad event) are also a very consistent slow drop. Example: the last 8 quarters are in order:

ARR Growth rate:

Year. Q1. Q2. Q3. Q4.

  1. 42% 37% 35% 34%
  2. 32% 32% 27%. 24%
  3. 22%. 20%

I guess you could argue that the growth rate changes in Q3 of 2024, but I think it looks like a consistent decrease for 10 quarters.

Randy

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I took a look at all four. Only panw is gaap income positive. However, what matters is free cash flow. All four are free cash flow positive, and the free cash flow is growing fast. They look like great companies.

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I think ZS and CRWD are way overvalued and could easily take huge haircuts when the next correction happens. I started a position in RBRK recently as my lone cybersecurity stock. I like their growth and they seem to be on the path to profitability.

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Don’t disagree with you on a numbers basis Jeff but this just seems like an industry that has to continue to grow and the nobody will want to take a chance with an upstart which means the companies that are doing well should be the ones who continue to do so.

If you know a company’s going to grow for a long time, it’s hard to play too much….

Randy
Long PANW and CRWD and PANW Tickerguide

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A quick and effective way to trigger a deeper look at tickers that may be of interest for entry and as well as those whose valuation suggests avoidance is Jamin Ball’s weekly Clouded Judgement. Among his graphical displays is this scatter chart., which has initiated the investigation leading to the entry of several of my holdings including RBRK. more recently MNDY and quite a number of past holdings.

Gray

image
image1456×736 76 KB

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@Graydrake That is a heavily curated list of SaaS companies that Jamin Ball uses, which for some reason includes a ton of names with sub 20% growth, and then leaves off other high growth SaaS names.

For example PAY Paymentus which is a SaaS company, would appear very well on this graph on the far right side and stronger in terms of valuation. Revenue growth for them is 41% in the latest quarter, and is in much deeper value territory than the names you mentioned.

Using the 12-month look ahead that Ball uses, here’s how those three companies look from a valuation perspective,

PAY vs
PAY vs688×770 17.3 KB

A couple other issues here,

  • The graph presented is for next 12 months estimates from analysts. I’d prefer using delivered results as opposed to the guesses that analysts have who are covering 50+ companies
  • Companies that are not SaaS are left off such as APP. Adding APP to this graph would extend the graph nearly double on the X-axis, but instead this type of analysis assumes any company non-SaaS is not worth looking at
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WPR - I did not mean to imply Ball’s listed tickers are truly hypergrowth or that Ball’s data becomes the sole basis for an entry or exit. I did suggest, however, Ball’s data includes quite a number of tickers held in the past and now by multiple members of this community. With this in mind, his analytical data may be used as a meaningful supplemental tool triggering further investigation or assisting in the pursuit of a final decision on ticker entry, exit or abandonment.

Gray

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The format seems completely good to me, and I also find it useful to compare valuations between companies in the same industry or business model like SaaS.

I’m questioning why the list is being pre-filtered and not including all SaaS names. The one SaaS company I have my eye on specifically because of its low valuation doesn’t show up on the list. I don’t get why Paymentus is being filtered off the graph when it’s SaaS.

This stands out to me because Paymentus would show up on the same X-axis as RBRK but well below it on the Y-axis because it is much cheaper.

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Without wanting to get dragged too far off topic, I strongly appreciate the tracking, analysis, charting and databank that Jamin produces and maintains as well as his weekly topic of discussion.

I take this universe set as a list of “cloud software companies” rather than SaaS. I have 2 observations about this…

  1. As William points out - it isn’t a complete list of software or maybe even cloud software and there are some omissions.
  2. This set includes: pure SaaS businesses for sure but also cloud software companies that operate: a consumption based revenue model (e.g. Snowflake/Datadog) vs a classic subscription based one, software companies with transaction based revenues (Shopify), and some with even hardware revenues attached (Palo Alto) not to mention product/service revenues associated with implementation and roll out.

Whilst the ARR data capture/estimates helps to establish a relatively like for like comparator, the revenue and business models do vary considerably within this list.

Ant

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Randy - if/when you get to the next quarterly update, whilst it is proving easier to source the ARR numbers reported, you might want to factor in that some players are now starting to juice growth rates with M&A which adds some complexity trying to decipher the true organic L4L growth rates YoY and draw comparisons between the companies.

PANW obviously has been a serial acquirer but ZScaler also made a significant acquisition that hit the numbers this latest quarter.

Ant

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