CrowdStrike (CRWD -3.09%) and Palo Alto Networks (PANW -2.48%) represent two very different ways to invest in the growing cybersecurity market. CrowdStrike operates a cloud-native platform that eliminates the need for on-site appliances (which can be expensive and difficult to scale as an organization expands). Palo Alto provides a diverse mix of on-site appliances, cloud-based services, and artificial-inteligence-powered threat detection tools.
Over the past 12 months, CrowdStrike's stock plunged more than 40% as rising interest rates drove investors away from higher-growth tech stocks. Palo Alto Networks' share price fared a lot better with just a mild decline of 3%. Will Palo Alto continue to outperform its higher-growth competitor over the long term?
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The three ways CrowdStrike beats Palo Alto Networks
The first way in which CrowdStrike beats Palo Alto is its established first-mover's advantage in the growing market for cloud-native endpoint security services. That enabled it to expand its total number of subscription customers from 5,431 at the end of fiscal 2020 (which ended in January 2020) to 21,146 in the third quarter of fiscal 2023. IDC now ranks it as the largest vendor in the "modern" endpoint security market, and many other vendors -- including Palo Alto Networks -- have been scrambling to expand their own cloud-native services to stay competitive.
Second, CrowdStrike is growing a lot faster than Palo Alto. CrowdStrike's annual revenue rose 93% in fiscal 2020, 82% in fiscal 2021, and 66% to $1.45 billion in fiscal 2022. It expects its revenue to rise 53% to 54% this year. It's still unprofitable as measured by generally accepted accounting principles (GAAP), but it turned profitable on a non-GAAP basis in fiscal 2021. Its non-GAAP EPS jumped 148% in fiscal 2022, and it expects 122% to 127% growth this year.
And third, CrowdStrike is less dependent on acquisitions than Palo Alto, which acquired more than a dozen companies -- mainly to expand its higher-growth cloud and artificial intelligence (AI) security segments -- over the past five years. CrowdStrike only bought five smaller companies during that same period, so it arguably faces a lower risk of suffering acquisition indigestion than Palo Alto.
The three ways Palo Alto Networks beats CrowdStrike
Yet Palo Alto has three major advantages against CrowdStrike. First and foremost, it's a much larger company, serving over 80,000 enterprise customers worldwide. It's also better diversified with three distinct ecosystems: Strata for its traditional network security services, Prisma for its cloud-native services, and Cortex for its AI-powered tools.
That scale -- along with its acquisitions -- enables Palo Alto to generate slower but more stable growth than CrowdStrike. Its revenue grew 18% in fiscal 2020 (which ended in July 2020), 25% in fiscal 2021, and 29% in fiscal 2022. It expects its revenue to rise another 25% to 26% this year.
In an unsteady market rattled by rising rates and other macro headwinds, investors will generally favor slower-growing companies with stable growth, instead of hypergrowth ones with decelerating growth. The two companies also provided very different near-term outlooks during their latest conference calls: Palo Alto expects to overcome the near-term macro challenges with "strong and focused execution," while CrowdStrike is bracing for tougher times and "elongated sales cycles."
Second, GAAP profits matter a lot more than non-GAAP profits during bear markets. Palo Alto was unprofitable by GAAP measures for years, but it finally started generating stable GAAP profits over the past two quarters. And it expects to remain profitable throughout all of fiscal 2023. As for Palo Alto's non-GAAP earnings per share, they declined 10% in fiscal 2020, rose 26% in fiscal 2021, and grew 23% in fiscal 2022. It expects its non-GAAP EPS to increase another 34% to 37% this year.
And third, Palo Alto looks a lot cheaper than CrowdStrike. It trades at 52 times forward earnings and 6 times next year's sales, while CrowdStrike trades at 76 times forward earnings and 10 times next year's sales.
The obvious winner: Palo Alto Networks
I personally own shares of CrowdStrike and Palo Alto Networks, and I'm still optimistic about the long-term prospects of both. However, Palo Alto's more predictable sales growth, rising GAAP profits, and lower valuation all make it a much more appealing investment than CrowdStrike in this hostile market for imperfect growth stocks.
