Up to 1.5 billion cyberattacks occurred globally last year, according to the cybersecurity firm Kaspersky, as outdated systems and a shift to remote work during the pandemic created new opportunities for hackers. A single data breach costs a company an average of $3.92 million, according to Security Intelligence, due to the high costs of recovering lost data.
Those threats have lit a fire under the cybersecurity market, which Grand View Research valued at $156.6 billion in 2019. The research firm expects that market to grow at a compound annual growth rate of 10% between 2020 and 2027 as cyberattacks evolve and intensify worldwide.
Investors can simply buy the ETFMG Prime Cyber Security ETF (NYSEMKT:HACK), which owns a basket of top cybersecurity stocks, to gain broad exposure to that market. The ETF rallied about 80% over the past three years, and outperformed well-known players like FireEye (NASDAQ:FEYE) and Check Point Software (NASDAQ:CHKP).
However, investors looking for a single high-growth company that can outperform the broader cybersecurity market should consider investing in Palo Alto Networks (NYSE:PANW), which rallied about 130% over the past three years. Let’s see why Palo Alto could outperform its peers and the broader market again in 2021.
A leader in perimeter defenses
Palo Alto’s core product is its Next-Generation Firewall, which is installed through on-site appliances and cloud-based services. The firewall supports its newer services, including its cloud security suite Prisma and its AI-powered threat detection platform Cortex.
Palo Alto serves over 77,000 customers in more than 150 countries, including some of the world’s largest Fortune 100 and Global 2000 companies. Gartner has named it a “Magic Quadrant” leader in network firewalls for nine straight years, and that reputation locks in customers and holds rivals at bay.
How fast is Palo Alto Networks growing?
Palo Alto Networks has consistently generated double-digit growth in revenue and billings over the past three years:
In the first quarter of 2021, Palo Alto’s revenue rose 23% year over year as its billings grew 21%. For the full year, it expects its revenue to rise 20%-21% and for its billings to increase 18%-19%.
Palo Alto attributes that stable outlook to the rapid adoption of Prisma Cloud, its all-in-one cloud-native platform, which eliminates the need for on-site appliances. Prisma competes against other cloud-native platforms like Crowdstrike‘s (NASDAQ:CRWD) Falcon, but it’s locking in large customers at an impressive rate.
Last quarter, Palo Alto stated that 20% of the Global 2000 and 70% of the Fortune 100 were using Prisma Cloud, up from 14% of the Global 2000 in the fourth quarter and 43% of the Fortune 100 in the third quarter.
Another catalyst is its planned takeover of Expanse, which provides mission-critical attack surface management services to the U.S. military and other organizations. Palo Alto will integrate Expanse into Cortex’s AI platform to “stitch together external, internal and threat data” to provide companies more complete views of their data infrastructure.
Palo Alto expects Prisma and Cortex to boost its ARR (annual recurring revenue) from cloud and AI services by 89% in fiscal 2021. It still expects that figure to rise 71% after excluding Expanse’s revenue.
How profitable is Palo Alto?
Palo Alto remains unprofitable on a GAAP basis, mainly due to its heavy dependence on stock-based compensation. However, it’s profitable on a non-GAAP basis, which excludes those expenses.
Non-GAAP Net Income
Palo Alto’s earnings declined in 2020 due to several acquisitions, including the machine identity firm Aporeto to strengthen Prisma, the consulting firm Crypsis Group to bolster Cortex’s forensics capabilities, and the software-defined networking company CloudGenix to expand its secure access service edge (SASE) platform.
Palo Alto expects that pressure to continue in 2021 as it integrates Expanse and potentially makes more investments and acquisitions. However, it still expects its non-GAAP earnings to grow 17%-19% for the full year.
A healthy balance of value and growth
Cybersecurity stocks often fall into two categories: slow-growth companies that trade at low valuations, and high-growth ones that trade at frothy valuations.
Check Point, which will likely generate single-digit revenue and earnings growth for the foreseeable future, trades at 18 times forward earnings. Meanwhile, analysts expect Crowdstrike to grow its revenue and adjusted earnings 79% and 152%, respectively, this year — but it trades at over 700 times forward earnings, and 40 times next year’s sales.
Palo Alto, which trades at less than 70 times forward earnings and seven times next year’s sales, offers a healthy balance between value and growth. That balance, along with its expanding ecosystem and wide moat, make it my top cybersecurity pick for 2021.