What happened
A broad cross-section of stocks were mixed on Wednesday, as Wall Street digested conflicting financial results from a number of companies in the midst of macroeconomic headwinds.
With that as a backdrop, a number of cybersecurity companies outperformed the broader markets. Shares of CrowdStrike Holdings (CRWD 3.63%) climbed as much as 3.5%, Zscaler (ZS 3.48%) jumped as much as 4.4%, and Fortinet (FTNT 1.74%) rose as much as 2.6%. As of 1:03 p.m. ET, the trio were still trading higher, gaining 3.3%, 3.3%, and 0.6%, respectively.
A check of all the usual sources -- regulatory filings, analyst's commentary, and financial reports -- found no company-specific news fueling the gains, suggesting the stock price moves were driven by robust financial results of a rival in the space.
Image source: Getty Images.
So what
Palo Alto Networks (PANW 4.19%) reported the results for its fiscal 2023 second quarter (ended Jan. 31), and investors cheered. Revenue of $1.66 billion grew 26% year over year, driven higher by strong momentum from existing customers. This resulted in robust adjusted earnings per share (EPS) of $1.05.
Investors were looking for the company to deliver profitability on a GAAP basis, and they were not disappointed. Not only was Palo Alto Networks profitable for the third consecutive quarter, but management is expecting that to continue for the full fiscal year.
Earlier this year, management conveyed plans to focus on delivering consistent bottom-line growth, and the company delivered on that promise. Palo Alto Networks delivered non-GAAP (generally accepted accounting principles) operating margins of 22.8%, up 440 basis points compared to the prior-year quarter.
Given the challenging macroeconomic environment, investor sentiment got a boost from the positive outcome, as it bodes well for other companies in the space.
Now what
Comments by Palo Alto's management may have done as much to fuel positive investor sentiment for our trio of stocks as the results themselves.
On the conference call to discuss the results, CEO Nikesh Arora noted that even as the macroeconomic environment was "making business leaders more cautious," the uncertainty was actually fueling demand for cybersecurity services. "The current macro environment is causing more customers to watch their capex budget," Arora said. "This shift, along with the fact that customers are transforming the data centers moving to the cloud, is leading more of them to adopt software firewalls."
The digital transformation, the trend toward cloud computing, and the need for cloud security solutions obviously has positive implications for Zscaler, CrowdStrike, and Fortinet.
- Zscaler is a pioneer in cloud security, with the world's largest in-line security cloud platform, owning more than 150 data centers dedicated to cloud security and secure digital transformation.
- Fortinet's integrated platform offers security and network functionality across wide-area networks, endpoints, and the cloud.
- CrowdStrike's cybersecurity platform is a leader in cloud-delivered endpoint security, cloud workload, and identity and data protection.
Furthermore, these stocks are still well off their respective peaks reached in late 2021, though the differences vary widely. Fortinet is still down 19%, CrowdStrike has fallen 61%, and Zscaler has plunged 64%. Today's gains suggest investors are piling back into beaten-down cybersecurity companies ahead of a potential bull market rally, which could kick off as early as this year.
To be clear, none of these stocks are cheap in terms of traditional valuation metrics. Zscaler, Fortinet, and CrowdStrike are currently selling for 9.6 times, 7.3 times, and 7 times next year's sales, when a reasonable price-to-sales ratio is generally between 1 and 2.
While each stock has its merits, CrowdStrike is the surest bet, in my opinion. Even with the lowest valuation among the three, its revenue growth is top notch. During the first three quarters of its fiscal 2023, the company has increased its revenue by 57%, making the stock an unqualified buy.
