ZS vs PANW

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So I am a holder in both ZS and PANW. I also am much more of a buy and holder than most on this board. No issues with that but I wanted to put that out there before I get to the heart of my discussion.

I have to admit surprise when I saw a few of the monthly portfolio reports for September that ZS had increased in many of them.

I recognize the numbers still look good for ZS, but I also saw that PANW had come out and specifically mentioned them as somebody they are competing (and according to them) winning. Then I hear from ZS and they admit the bigger contracts are taking a little longer to close.

I recognize that low guidance seems like a standard theme for these high growth stocks anymore, but when they give a reason that coincides with their competition, it seems like it might be good to give that warning a little more credence.

I did see the ZS CEO on Cramer and he was pretty convincing that it is tough for the traditional security companies to follow them but…

So my concern is that they may not hold onto to the “category crusher” and disruptor title if PANW is reacting and starting to take sales.

Now I expect the answer many here may give is that ZS showed 53% revenue growth last quarter and PANW had 29%, which is true. Another way to look at it is that ZS had 86 million in sales last quarter and PANW had 806. If you look at yr over yr increase in sales ZS had 30 and PANW had 145 million.

Think about it. The increased sales that ZS had last quarter was 1/4 of PANWs and total sales is 1/10. You could argue that PANW is getting more new sales than ZS. If PANW has reacted to the competition and is now competing well, they are in a very strong position to win as it is much easier to keep your customers than get them to change. This has been an argument for the high P/S of all these companies on this board for some time. The concern has always been will competition increase before the growth rates can have their long term desired effect.

In any case, this has been a concern of mine and I was surprised to see no mention in anybody’s discussion of buys and sales.

To be clear, I own a bit of ZS and a small amount of PANW. Just some thoughts going through my head in trying to decide how to allocate between these two from here…

Thoughts?

Randy
Long ZS and PANW.

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ZS showed 53% revenue growth last quarter and PANW had 29%, unless together they are taking almost all the business from lots of failing firms that shows a very rapid growth of the whole underlying sector. A strong rising tide perhaps able to lift more than one boat. As a ZS stockholder I would not be unhappy with the result being a duopoly, something more likely than a 100% 'take all the market 'for any one company. Even a giant platform company like Microsoft has competitors.
And a rival taking 1/10 of your sales is enough for an incumbent to react , but probably not enough for them to take a chance on killing the cash cow they already have.

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We had a whole 50+ post thread a few days ago on this topic and is worth your review.

My question though is how exactly is Palo Alto competing with Zscaler?

Their products both provide security but their cloud product is not multi tenant and does not stand on its own (meaning you don’t get rid of Palo Alto’s appliances).

First, Palo Alto stated a whopper about Zscaler “breaking” 365 when Microsoft recommends Zscaler but not Palo;

Second, it is a simple upsell for Palo to sell their cloud extension product to their installed base and call it “winning” except Zscaler does not sell appliances or make small sales.

Zscaler makes large top down sales; on the margin a company might try out Zscaler for a branch office but otherwise these Palo Alto cloud sales are not sales where they are competing (at all) with zscaler.

Thus the question: where is Palo Alto competing with Zscaler? According to Zscaler they hardly see Palo Alto at all - and this makes sense because the product Zscaler sells, they sell because either appliances can’t do the job or they are tired of appliances. And until recently at least, Zscaler has sold to green field opportunities and displaced appliances only incidentally.

So that is my question. Where does Palo Alto actually really compete with Zscaler?

Example given: Siemens has gone all Zscaler. All 150k plus of their employees. They got rid of all their appliances (whether they were Palo Alto or Cisco or whomever) and have exact ZERO chance of selling Siemens anything.

So someone please, with some knowledge answer that question.

Thank you.

Tinker

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ZS had 86 million in sales last quarter and PANW had 806. If you look at yr over yr increase in sales ZS had 30 and PANW had 145 million.

Sounds a lot like the David and Goliath parable. Why is Goliath so concerned about David? For PANW to even hint they are winning against a wee little startup like ZS tells me PANW feels threatened.

On the big picture of cyber security there are a lot of players, with different approaches, and different parts. You can run the alphabet, here are a few: ARUN, CHKP, CRWD, CSCO, CYBR, FEYE, FTNT, IBM, JNPR, OKTA, PANW, ZS, and there are several others. Some play together, some overlap, some compliment.

The one key takeaway is that this confusing chaotic bag of hardware, software and services are ripe for disruption for three main reasons: (1) the tectonic shift to cloud, (2) SaaS as a game changing business paradigm, and (3) because tireless hackers continually adapt and change their tactics.

The firewall regime are the old guard, they built their strategy around physical edge security; firewalls to keep bad guys out, and keep everything inside safe. They still play a vital role in the current landscape, so they still have sizable market, but by themselves they can’t keep our data safe.

Many data breaches are not simply brute-force attacks, where firewalls are most effective, they are more often either accidental or sophisticated social engineering attacks, such as phishing/malware, attacks from the inside, weak data sharing processes, etc. Hence, there is growing demand to protect against such threats. That’s were the opportunities are, and where the battle for next generation cyber security will be fought.

The old firewall brigade (ARUN, CHKP, CSCO, FTNT, IBM, JNPR, PANW) are locked into their bread and butter hardware, they aren’t moving quick enough to adapt, so opportunistic startups are showing them up in various ways. Hence, PANW dissing ZS suggests they are feeling the pain and they’re desperately trying to stem the bleeding.

Just my $0.02 from a casual observer.

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Not to feed the flame of additional ZS discussion; because we all know that went on for an extended thread last week; but I felt this Seeking Alpha article would be of interest to Zscaler investors such as myself:

https://seekingalpha.com/article/4295420-50-software-stocks-…

Those Zscaler investors on this board may find this article “reinforcement” but not too much new material on the strong thesis for Zscaler.

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Btw I just want to point out that just because I respond to what is misunderstanding of what Zscaler is and the misinformation campaign that Palo Alto is in the midst of does not mean all is hunky dory.

As Mauser expressed, Zscaler is hitting through the chasm and has to accelerate new customer adds each year plus take more per customer each year (the latter element easier than the former).

When the Tableau FUD hit Alteryx that was a huge FUD buying moment. As Alteryx was also having no fundamental concerns business wise either.

With Zscaler, even though I think that Palo Alto is a non-starter in reference to great threats, Zscaler, independent from any Palo Alto issues (any is negligible) has a more difficult time as it moves to acquire the next 20 or 30% of the Fortune 2000.

Thus Zscaler FUD - Indeed! The FUD by itself buy opportunity. But Zscaler has to pound through the sales challenge as it is not just sales but rate of sales that count and Zscaler is evolving to make that happen.

In comparison Alteryx just had FUD. No countervailing business evolution challenges.

In the end probably the same result but Zscaler is likely to be much lumpier and longer term outlook than Alteryx was simply due to how much easier Alteryx land and expands are compared to Zscaler.

I am distinguishing between these FUD events as each situation is different. This said I own a lot of Zscaler in a don’t look “metaphorically” part of my port. When the Alteryx FUD event happened it was “scary” yet one knew, piercing through the veil of fog that it was all crapulence.

Palo Alto is a non issue, scaling sales team a fundamental challenge in progress. Alteryx did not have to take on the same challenge.

Tinker

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