Palo Alto Networks (NYSE:PANW) and CrowdStrike (NASDAQ:CRWD) are both well-known cybersecurity companies. Palo Alto is an early mover and market leader in enterprise firewalls, while CrowdStrike is a pioneer in cloud-native cybersecurity services.
Palo Alto went public back in 2012 at $42 per share, and the stock is now worth about $360. CrowdStrike went public at $34 per share in mid-2019, and it's trading at nearly $220 today. Those multibagger gains are impressive, but which cybersecurity stock has more room to run in 2021?
The differences between Palo Alto and CrowdStrike
Palo Alto's core product is its Next-Generation Firewall, which it deploys via on-site appliances and cloud-based services. It serves more than 77,000 customers in over 150 countries, and research firm Gartner has named it a "Magic Quadrant" leader in network firewalls for nine straight years.
Palo Alto's firewall forms the foundation of its "land and expand" strategy, which enables it to cross-sell other services, including its cloud-native platform Prisma and its AI-powered threat detection platform Cortex. It's been expanding that ecosystem by buying smaller companies, including the machine identity firm Aporeto, the consulting firm Crypsis Group, and the software-defined networking company CloudGenix.
CrowdStrike doesn't deploy any on-site appliances. Its core platform, Falcon, is a cloud-native suite of services for endpoint security, threat detection, and response services for large organizations. It's a more comprehensive solution than Prisma, which is mainly a cloud-based extension of Palo Alto's firewall for securing cloud-based resources.
CrowdStrike serves nearly half of the Fortune 100, including major banks, healthcare organizations, and energy companies. It's also investigated several high-profile attacks, including the Sony Pictures hack in 2014 and the cyberattacks against the DNC in 2015 and 2016.
Which company is growing faster?
Palo Alto's revenue and billings rose 18% and 23%, respectively, in fiscal 2020. Its adjusted earnings declined 10%, mainly due to the aforementioned acquisitions, which were subsequently integrated into its Prisma, Cortex, and secure access service edge (SASE) platforms.
Palo Alto's revenue and billings rose 23% and 21%, respectively, in the first quarter of 2021. Its adjusted earnings grew 54%.
Palo Alto noted 70% of the Fortune 100 companies were using Prisma in the first quarter, up from 43% in the third quarter of 2020. Those numbers suggest that Prisma and Falcon's customer bases overlap -- and that there could be plenty of room for both platforms to grow.
For the full year, Palo Alto expects its revenue to rise 20%-21%, its billings to increase 18%-19%, and its adjusted earnings to rise 17%-19% -- even as it integrates Expanse, the attack surface management services firm it recently acquired, into Cortex's AI platform. Analysts expect its revenue and earnings to rise 18% and 20%, respectively, next year.
CrowdStrike's revenue rose 93% in fiscal 2020, which ended last January, and its adjusted net loss narrowed significantly. In the first nine months of fiscal 2021, its revenue rose 85% year-over-year and it posted an adjusted profit. Its total number of customers also rose 85% year-over-year at the end of the third quarter.
CrowdStrike's dollar-based net retention rate remained above 120% over the past three quarters, which means its existing customers spent at least 20% more on its services than the previous year.
That's because 44% of its subscribers were using five or more of its cloud modules at the end of the third quarter, up from 39% in the second quarter and 35% in the first quarter. Palo Alto doesn't disclose its net retention rate or Prisma's "land and expand" rate in terms of modules yet.
CrowdStrike expects its revenue to rise 78%-79% for the full year, and to post its first annual profit. Analysts expect its revenue and adjusted earnings to rise 41% and 64%, respectively, in fiscal 2022.
Don't buy the right company at the wrong price
If valuations didn't matter, CrowdStrike would be a better buy than Palo Alto. It isn't burdened by an older appliance-based business, it's built for the cloud, it isn't as dependent on big acquisitions, and it's generating stronger sales growth. Crowdstrike also provides clearer insights into its cloud business with net retention and module adoption rates.
But valuations matter, and investors should never pay the wrong price for the right company. CrowdStrike currently trades at 40 times next year's sales and over 600 times forward earnings -- so there are years of unfettered growth already baked into this high-flying stock.
Palo Alto trades at just seven times next year's sales and about 50 times forward earnings, which are reasonable valuations for a company that generates about 20% sales and earnings growth every year. That balance of growth and value make it a better overall investment than CrowdStrike right now.