Better AI Stock: Palo Alto Networks vs. CrowdStrike

Artificial intelligence (AI) is expected to revolutionize multiple industries, and cybersecurity is one of them. Companies in this sector are increasingly adopting the technology to automate threat detection and prevent cyber attacks, among other things.

Morgan Stanley points out that cybersecurity companies can detect attacks more accurately with the help of AI, analyze massive volumes of data quickly to contain cyber threats, and detect the weaknesses of cyber defenses so that they can be shored up before any attack. The investment bank adds that the market for AI-powered cybersecurity products is expected to grow from just $15 billion in 2021 to $135 billion in 2030.

That's why now is a good time for investors to take a closer look at shares of Palo Alto Networks (PANW 0.91%) and CrowdStrike Holdings (CRWD 2.03%), two cybersecurity stocks that could win big from AI. While Palo Alto stock has surged 77%, CrowdStrike has logged a gain of 42%. However, CrowdStrike stock has lost momentum of late as the company's growth is impacted by economic headwinds.

Does this make Palo Alto a better play on AI in cybersecurity? Or will CrowdStrike be able to regain its mojo following its recent hiccup? Let's find out.

The case for Palo Alto Networks

Palo Alto Networks' impressive 2023 rally can be attributed to the company's consistently strong growth. The cybersecurity specialist not only beat Wall Street's estimates when it released its fiscal 2023 third-quarter results (for the three months ending April 30), but it also raised its full-year guidance despite a challenging macroeconomic environment.

Palo Alto expects to finish the current fiscal year with a revenue jump of at least 25% to $6.88 billion. It has also guided for non-GAAP earnings of $4.27 per share, which would be a big jump over fiscal 2022's figure of $2.52 per share. More importantly, Palo Alto CEO Nikesh Arora pointed out on the May earnings conference call that there is a lot of opportunity for the company to embed generative AI into its products.

According to Arora, "Generative AI will help us improve our core under-the-hood detection and prevention efficacy." As a result, Arora says that Palo Alto will start integrating generative AI into its solutions in the coming months. The company has already started working internally on deploying generative AI technology in its products, and we can expect to hear more from Palo Alto when these solutions hit the market.

It is worth noting that Palo Alto has been integrating AI into its operations over the years, and the company is now looking to push the envelope with the advent of generative AI. This should ideally help Palo Alto further increase its share of the cybersecurity market.

According to market research firm Canalys, Palo Alto was the top player in the global cybersecurity market in the third quarter of 2022 with a share of 8.4%. Its market share was up from 7.8% in the prior-year period during that quarter. The improvement in Palo Alto's share of the cybersecurity space is evident from the growth in the company's remaining performance obligations (RPOs), a metric that measures the total value of a company's contracts with its customers that have yet to be fulfilled.

Palo Alto's RPO increased 35% year-over-year in the previous quarter to $9.2 billion, pointing toward a solid revenue pipeline. This was faster than the growth in the company's actual revenue, suggesting that the value of its future contracts is growing at a nice clip. The arrival of generative AI-driven offerings from Palo Alto could help it land more lucrative contracts and drive solid bottom-line growth, with analysts expecting the company's earnings to increase at an annual rate of 34% for the next five years.

The case for CrowdStrike

As mentioned earlier, CrowdStrike stock has lost momentum since releasing results in late May for its fiscal 2024 first quarter (ended April 30). Though there was a lot to like about CrowdStrike's recent results -- a 42% jump in quarterly revenue to $692 million and a small profit, compared to a loss in the year-ago period -- the market seems to be disappointed with its guidance.

CrowdStrike anticipates just over $3 billion in revenue for fiscal 2024. While that would translate into decent growth of 35% over the prior year, it would be a big step down from the 54% growth that CrowdStrike delivered in fiscal 2023. So while Palo Alto has managed to increase its guidance and is on track to deliver another year of consistent growth in the current fiscal year, CrowdStrike seems to be lagging.

However, it is worth noting that CrowdStrike's offerings are in solid demand as customers buy more of its modules. The number of CrowdStrike's customers who were using five or more of its modules last quarter stood at 62%, up three percentage points over the prior-year period. And now the company has introduced a generative AI security analyst, known as Charlotte AI, which it believes will improve the efficiency of human analysts.

CrowdStrike CEO George Kurtz pointed out on the company's May earnings call that:

We believe Charlotte AI will empower a newly minted Tier 1 analyst to yield the results of an advanced Tier 3 analyst. The net benefit to the customer: faster results, better security outcomes, and lower overall costs. Charlotte AI represents CrowdStrike's latest innovation in helping security teams worldwide contend with the cybersecurity skills gap, respond to threats faster, and reduce operational costs.

So CrowdStrike has already made a move in the generative AI-powered cybersecurity space, while Palo Alto is working to introduce such a solution. Given that CrowdStrike's customers have been willing to adopt more of its solutions, it wouldn't be surprising to see them spend money on the company's generative AI solution as well.

The company had more than 23,000 customers at the end of the previous fiscal year, so it has a large base it can sell its generative AI-powered security assistant to -- and that could help CrowdStrike improve its pace of growth.

The verdict

We have already seen that CrowdStrike is on track to deliver robust growth this fiscal year despite macroeconomic challenges. What's more, the company is expected to clock faster growth than Palo Alto.

Source: YCharts

Given that CrowdStrike is enjoying a first-mover's advantage in generative AI-driven cybersecurity solutions, it may be able to sustain a higher pace of growth than Palo Alto. Also, CrowdStrike is trading at 14.4 times sales, which is only slightly higher than Palo Alto's multiple of 12.5.

So investors looking for a cybersecurity stock that could take advantage of the adoption of AI in this industry might want to consider buying CrowdStrike due to the reasons mentioned above. But then, Palo Alto could also turn out to be a solid long-term pick given its solid market share and its push into generative AI in the coming months, so investors probably cannot go too wrong with either of these two potential AI winners.