Palo Alto Networks vs Cisco Stock: Which is Better?

The incessantly growing threat of cyberattacks has become a major concern for companies and cybercrimes are expected to cause $10.5 trillion in yearly damage by 2025, resulting in a $1.5-$2 trillion market opportunity for cybersecurity solutions. The rise of AI also warrants the need for greater precautions against the evolving threat landscape.

As a result, cybersecurity firms display excellent prospects despite facing stiff competition. We examine cybersecurity stalwarts Palo Alto Networks, Inc. (NASDAQ:PANW) and Cisco Systems, Inc. (NASDAQ:CSCO) to determine which offers more potential.

Why Did Palo Alto Networks Stock Drop?

Cybersecurity company Palo Alto Networks has rapidly become a leader in the field to detect cyber threats for enterprises. The company possesses a comprehensive cybersecurity portfolio to help enterprises on their digital journey.

Regardless of its prowess, the company is facing a choppy macroeconomic situation and revenue growth has somewhat slowed.

In the fiscal 2024 second quarter (ended January 31, 2024), Palo Alto Networks’ total revenue came in at $1.98 billion, up 19% from the prior-year period, which is slower than the year-over-year growth exhibited between the Q2 revenues of fiscal 2023 and 2022, and fiscal 2022 and 2021.

On the bright side, Q2 2024 was the company’s 8th consecutive quarter of operating margin expansion, when its non-GAAP operating margin reached 28.6%.

Total billings, defined as total revenue plus changes in total deferred revenue net of total acquired deferred revenue, climbed by 16% year-over-year to $2.35 billion, indicating a focused operation despite experiencing weakness in its federal vertical.

On a trailing-12-month basis, Palo Alto Networks generated $2.90 billion in adjusted free cash flow, while non-GAAP earnings per share grew by 39% year-over-year to $1.46, which highlighted that – even without one-time items – the bottom line is growing.

Despite posting moderate yet meaningful financial growth, the company’s Q2 results also led to a sell-off in the stock due to subdued guidance.

After the earnings release, the share price fell by 28%, marking the worst day since its IPO, as the company lowered its fiscal-year billings outlook from $10.70-$10.80 billion to $10.10-$10.20 billion. Revenue outlook decreased from $8.15-$8.20 billion to $7.95-$8.00 billion.

To curtail this slowdown, Palo Alto Networks is gearing toward greater cybersecurity consolidation, essentially shifting to an integrated security approach that better positions the company to counter risks. To reach an annualized recurring revenue (ARR) of $15 billion by 2030, it accelerated its “platformization” and consolidation strategy.

How the Prospects Look for Cisco Systems?

With a market capitalization of more than $200 billion, Cisco has long thrived as a networking stalwart. The company was a Wall Street darling during the dot-com bubble, and in March 2000 it became the most valuable company in the world for a period, with a market valuation of $500 billion.

Although the road has not been as smooth for Cisco ever since, it has remained resilient in the face of adversity. In addition to offering networking equipment such as switches and routers, the company has an extensive portfolio of cybersecurity solutions.

Cisco is attempting to transform from a company largely dependent on selling networking products to a subscription-based business model, recognizing its scope and revenue stream. This is designed to help the company, which is experiencing a slowdown due to customers scrutinizing a tough macroeconomic backdrop, and in turn should support demand.

In Q2 2024 (ended January 27, 2024), Cisco’s top line fell by 6% from the year-ago level of $12.79 billion due to a 9% year-over-year decline in product revenue to $9.23 billion.

This also affected its bottom line. The company’s modest growth over the past couple of years has not benefited its stock. Over the past two years, Cisco’s shares declined by about 10%.

As of Q2 2024, networking, its largest product category, fell by 12%, while security offerings gained 3%. As a testament to the company’s shift to subscriptions, total subscription revenue increased by 6% to $6.40 billion. This portion now represents 50% of Cisco’s total revenue.

While lackluster performance has restricted Cisco from becoming as popular as its few other tech contemporaries, it has exhibited a commitment to its shareholders. In the last reported quarter, the company returned $2.80 billion to shareholders and increased its quarterly dividend by 3% to $0.40 per share.

The annual dividend of $1.60 yields 3.22% on current prices while the 37.86% payout ratio indicates the sustainability of its dividend.

Alongside ventures in AI, the most notable of Cisco’s prospects is its $28 billion acquisition of software company Splunk, striving toward greater visibility across an enterprise’s digital footprint. This is expected to generate about $4 billion in additional ARR.

While Cisco ended last quarter with total cash, cash equivalents, and investments of $25.70 billion, it is trying to cut costs, with a planned layoff of 5% of its workforce. However, this has been the norm for many other tech giants.

Palo Alto Networks vs Cisco Stock, Which Is Best?

According to analysts, Palo Alto Networks stock is the better stock to buy with 17.9% upside to fair value of $335.92 per share whereas Cisco has upside of just 7.2% to $53.19 per share.

Both companies have flagged a hostile macroeconomic backdrop for sluggishness and each has adopted transformative approaches to address a slowdown. While Palo Alto’s headwinds are not that stark, Cisco has borne the brunt with top and bottom-line declines.

It’s noteworthy, though, that Cisco’s sustainable dividend payouts are attractive. Moreover, Cisco has a cheap valuation compared to a company of its stature. It is trading only 13.62x forward non-GAAP earnings, which is quite reasonable by industry standards whereas Palo Alto’s forward non-GAAP P/E of 51.68x is quite expensive.

Hence, as both stocks are not expected to skyrocket anytime soon, it might be wise to exercise caution and wait for better entry points. However, Cisco could be a better investment option now because of its lower valuation and dividend payments.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.