Below is the post I recently put on a few different boards within the paid portion and as usual, I am sharing a copy here. Because I am the Tickerguide for PANW it is a little more focused on PANW but I hope does not favor them but instead just a summary of the facts and thoughts based on those. In any event, here it is…
Here is my quarterly Cloud Cyber security comparisons again. I am once again looking at PANW, S, CRWD, and I have added ZS the last few quarters.
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, as usual PANW has a large traditional firewalled business that is separated out for this posts purposes. 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 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!)
Also, I will take a shot at looking at the firewall portion of PANW in a follow on post as I think that brings a lot of confusion and perhaps an investing detriment to people buying the company where the others are much more pure play cloud cybersecurity companies.
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.
Last year’s June / July Qtr results:
Company ARR ($M) % increase(yr/yr)
S……………….612.2……………47%
PANW……… 2,950…………….56%
CRWD……….2,930…………….37%
And the Sept/Oct Qtr report:
Company ARR ($M) % increase(yr/yr)
S……………….664………………43%
PANW……… 3,230……….……53%
CRWD……….3,150…………….35%
And the year end 2023 quarter for each and adding ZS into the mix.
Company ARR ($M) % increase(yr/yr)
S……………….734………………37%
PANW……… 3,490…………….50%
CRWD……….3,440…………….34%
ZS …………….2,100………….…35%
And the March 2024 quarter results
Company ARR ($M) % increase(yr/yr)
S………….…….762………………35%
PANW……… 3,790…………….47%
CRWD……….3,650…………….33%
ZS …………….2,212………….…32%
Finally the 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%
Note: For ZS, I estimated ARR by multiplying revenues by 4 to get an annual number. Not sure if that is perfectly correct but the best I can think to do. It’s funny because they are the only one who doesn’t report ARR right up front. If someone sees it and it’s worth correcting, let me know.
Overall, it seems to be more of the same. PANW surpassed CRWD a few quarters ago as the biggest in ARR and are adding to their lead every quarter. Growth for all four is great but has been slowly dropping but PANW seems to be hanging on to its lead from a year over year growth rate as well.
And in this quarter, the qtr over qtr rates also favor PANW with a 11.3% rate vs 5.7% rate for CRWD, and for completeness, the q/q for S was 5.8% and 7.2% for ZS. Personally I don’t put as much weight in qtr over qtr since seasonal or one sale in or out can change the game.
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 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 I said earlier, I will try to break out the Firewalled business in a separate note, but I will say that the economics of the company haven’t gotten any worse at all. Since this was 4th quarter, they reported Non-GAAP earnings up only 5%, but Operating margin up 320 basis points, and 2024 adjusted free cash flow up to 3.1 Billion dollars!!!
So there you have it. I never want to underestimate how the market reacts to a company as it is seldom wrong, especially over the long term, but it does seem like PANW was taken to the wood shed a little more than I would see as appropriate and has recovered a bit. It almost feels like ZS and CRWDs management hype is driving some of it, where as PANWs is a little more circumspect, although the numbers don’t really support the low key approach. And now CRWD has a bit of a hangover from their software update disaster. We will have to wait to see what if any long term effect there is from that.
As for PANW, if you are in for the long term, how much penalty do you attribute to a management that has a plan to improve margins even if there is a little short term pain. Especially when it is coming from a management that has consistently produced great results for years 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