2024 had a lot of ups and downs for two of the world's top cybersecurity companies, CrowdStrike (CRWD +0.08%) and Palo Alto Networks (PANW 1.04%). The former was involved in a highly publicized outage, while the latter made a radical change to its business strategy.
Both stocks ended 2024 with solid returns, with CrowdStrike the better performer. The question for investors, though, is: Which stock is likely to outperform in 2025?
NASDAQ: PANW
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Bumps in the road
During 2024, both CrowdStrike and Palo Alto experienced steep declines in their stock prices at certain points in the year. Palo Alto's stock fell precipitously in late February after the company told investors that it was seeing "spending fatigue" among its customers who wanted to see better returns on their cybersecurity investments. It said that cobbled-together point solutions from various vendors were no longer giving organizations a lot of incremental benefit.
In order to deal with what it was seeing, the company made a bold decision to shift strategy. Moving forward, it would focus on shifting customers onto one of its three broader cybersecurity platforms and moving them away from point solutions. However, in order to expedite this platformization strategy, the company decided to give away additional services to its clients for free for a period of time.
The reason for this was because customers didn't want to be paying for duplicate solutions at the same time. Meanwhile, these various point solutions had contracts with different ending points, so Palo Alto decided to entice customers to consolidate onto its platforms by letting them use its additional services for free while they have contracts with other cybersecurity companies.
Palo Alto management estimated that, on average, its strategy would be the equivalent of giving customers six months of free product capabilities. It expected this shift in strategy to pressure both its top-line revenue and billings growth over the next 12 to 18 months.
NASDAQ: CRWD
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CrowdStrike management would reference Palo Alto on its own conference call weeks after this announcement, saying: "It's the organization[s] trapped in these fragmented pseudo platforms riddled with bolt-on point products that are the ones suffering from fatigue."
However, CrowdStrike's stock would also plunge several months later after a botched update led to a worldwide outage of its cybersecurity platform that interfered with the operations of many of its customers. The outage gained worldwide media attention for the effect it had across various industries. Delta Air Lines was one of its most affected customers, as a time-consuming manual fix grounded its operations and cost it more than $500 million in canceled flights.
While CrowdStrike has thus far been able to hold on to most of its customers, this outage has led to an extended sales cycle and increased scrutiny around deals. This led the company to lower guidance during the year. The company also began offering customers what it called customer commitment packages to help compensate for the outage. This included a combination of new modules, added subscription time, and flexible payment terms (Flex dollars).
Image source: Getty Images.
The road to recovery
Since their precipitous falls, Palo Alto and CrowdStrike stocks have both largely recovered.
Palo Alto has been showing good progress with its platformization strategy. It ended the fiscal first quarter (ended Oct. 31, 2024) with 1,100 platformized customers, while noting it had seen a 6% increase in annual recurring revenue (ARR) from this group. Meanwhile, it is projecting to have 2,500 to 3,500 platform customers by fiscal year 2030.
CrowdStrike, meanwhile, hasn't seen much churn as a result of its outage. It reported a 97% gross retention last quarter. In addition, it appears the company is trying to turn the outage into an upsell opportunity by giving customers additional modules and Flex dollars, which could lead to greater adoption and customers paying for these modules in the future.
Turning to valuation, Palo Alto is the cheaper of the stocks. It's trading at just over 13 times this fiscal year's estimates on a price-to-sales (P/S) basis, while CrowdStrike trades at 21 times next year's fiscal-year estimates. The companies have different ending fiscal years, so this is the best forward-looking comparison. However, CrowdStrike grew its revenue by 29% last quarter, compared to only 14% for Palo Alto. Before the shift in strategy, Palo Alto was growing its revenue closer to 19% to 20%.
Overall, I think Palo Alto made the correct decision to implement its platform strategy, despite some near-term pain. That said, I think CrowdStrike looks like the slightly more attractive stock at this time. The outage notwithstanding, its cybersecurity platform remains a top contender, unlike Palo Alto's legacy firewall system. It is growing more quickly, and I think it has more upsell opportunities ahead as organizations continue the trend of consolidating on cybersecurity platforms.
CrowdStrike is my pick to outperform in 2025.
