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While cybersecurity may not attract as much investor attention as sectors like artificial intelligence (AI) or quantum computing, it remains a critical focus as threats from cybercriminals escalate. This growing concern around data breaches and system vulnerabilities has driven organizations to invest heavily in advanced cybersecurity solutions.
Among the leading providers in this domain are CrowdStrike (CRWD 0.26%) and Palo Alto Networks (PANW 3.51%). Both companies specialize in a variety of cybersecurity products, but they are particularly competitive in the vital area of endpoint protection, which safeguards devices like laptops from external cyber threats. Successfully winning customers in this segment opens opportunities for these providers to offer additional services and solutions.
Both CrowdStrike and Palo Alto provide robust solutions in endpoint protection, yet the question remains: which stock represents the better investment at this moment?
Similar Business Models in a Competitive Landscape
As both companies provide comparable services, investors may wonder if one stands out over the other. While in-depth cybersecurity expertise might be required for a thorough analysis, Gartner (IT -0.96%) delivers independent research that assesses various enterprises across multiple industries. Its Magic Quadrant ratings allow investors to gauge how these companies measure up concerning their “completeness of vision” and “ability to execute.”
The higher a company’s placement on these axes, the more favorable the evaluation of its product offerings. Current data from Gartner indicates that CrowdStrike surpasses not only Palo Alto but also all competitors in the endpoint protection sector.
While this product distinction is significant, it does not capture the entire business narrative.
CrowdStrike operates as a cloud-native enterprise leveraging AI capabilities where beneficial. Its core endpoint protection may attract clients initially, but it boasts nearly 30 additional cybersecurity modules that enhance its platform’s functionality. This all-in-one approach has gained traction, with 66% of its customers utilizing at least five modules and 20% engaging with eight or more.
Conversely, Palo Alto Networks, initially centered on firewall solutions, is transitioning to a similar cloud-based, AI-integrated model. The company promotes its strategy of “platformization,” aiming to create a comprehensive solution set akin to CrowdStrike’s offering.
In terms of business models, both companies are effectively following a comparable strategy.
Winner: Tie.
Assessing Revenue Growth
In its latest reported quarter, CrowdStrike achieved total revenues of $1 billion, marking a 29% increase year over year. Despite this, revenue can exhibit volatility for both firms, prompting each to also report annual recurring revenue (ARR), a metric that provides deeper insights. In Q3 of fiscal 2025 (ending October 31), CrowdStrike’s ARR reached $4.02 billion, reflecting a year-over-year rise of 27%.
Palo Alto presents a more complex growth narrative. Its next-gen platform, directly comparable to CrowdStrike, is thriving, with next-gen ARR soaring 40% year over year to $4.5 billion, surpassing CrowdStrike in terms of total ARR and growth rate. However, the overall revenue growth is tempered by its legacy business, which resulted in a 14% year-over-year increase to a total of $2.1 billion.
Determining a winner in this category is challenging, as Palo Alto is experiencing faster growth in key areas, despite a slower overall increase.
Winner: Tie.
CrowdStrike’s Path to Profitability
When it comes to profitability, Palo Alto Networks enjoys a distinct advantage, attributed to its status as a more established business. The legacy segments contribute positively to its profitability, contrasting with CrowdStrike, which has yet to achieve profitability.
CrowdStrike has significant potential for improvement in this area, but at present, Palo Alto stands as the leader.
Winner: Palo Alto Networks.
Valuation: Palo Alto Offers Better Value
A premium company can quickly become an unwise investment if acquired at an inflated price. Evaluating the valuation of both companies presents challenges, especially given CrowdStrike’s lack of profitability. However, it does achieve positive cash flows, which serve as a useful metric for comparison.
On this front, Palo Alto Networks offers a more appealing valuation, trading at roughly half the price of CrowdStrike.
Palo Alto also boasts superior free cash flow margins compared to CrowdStrike. Over the past year, Palo Alto achieved a 37% free cash flow margin, whereas CrowdStrike reported a 29% margin. Even if CrowdStrike’s performance matched Palo Alto’s margins, its valuation would still stand at 72 times its free cash flow, underscoring the relative affordability of Palo Alto stock.
Hence, Palo Alto seems to come out on top in this assessment.
Winner: Palo Alto Networks.
Final Thoughts on Investment Opportunities
With two wins and two draws, Palo Alto Networks slightly edges out CrowdStrike in this comparison. However, CrowdStrike’s positioning as a leader in providing exceptional offerings is a critical factor that investors should not overlook. Palo Alto’s slower overall growth trajectory could serve as a cautionary note for potential investors.
Ultimately, while investors may reach varying conclusions, both cybersecurity stocks have substantial merits, and owning shares in both companies may be a prudent strategy going forward.
Source
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