Cyberspending is on the rise. IDC, a market intelligence company, says that spending in the sector increased by 10.3% to $83.5 billion in 2017 and it is forecasting the market to grow even further. I
DC predicts that cybersecurity as an industry will reach $120 billion by 2020 – and no wonder. This is the industry that provides security for companies with online shopping portals as well as entire governments.
The software they produce keep applications and data safe from would-be attackers, but is it a good industry in which to invest?
Pros and Cons of Cybersecurity Stocks
Cybersecurity stocks certainly have the potential for significant upside – just look at the predicted growth for the market – and a clear need. However, they are not the investment juggernauts they once were.
In 2000, these companies skyrocketed in value and many of them fell from that lofty place just as suddenly. While they were, in hindsight, overvalued at that time, today they viewed as more stable tech stocks – but there is risk.
Cybersecurity companies are only as good as the products they sell. If an Internet attacker, hacker, or any other enemy of information can break through their systems, the cybersecurity company fails, and its stock runs down.
New entrants to the industry often struggle to get a foothold because they may not have the brand name or clout to back them at first, but all it takes is one big win, like finding a significant threat that one of the major companies missed, for that up-and-comer to become the next big thing.
Is Palo Alto Networks Worth Buying?
Palo Alto Networks (NYSE: PANW) offers a complete ecosystem of products and services. They all work together and they are all part of cybersecurity.
The company went on a buying spree in 2018. Before this, the company hadn’t bought anything since 2015.
It started in March 2018 when Palo Alto bought cloud security company Evident.io for $300 million. In April 2018, it purchased Secdo, an Israel-based company that focuses on EDR (endpoint detection and response), with a $100 million price tag.
Then, the company announced the $173 million purchase of cloud defense company Redlock in early October 2018.
“We are thrilled to add RedLock’s technology to our cloud security offerings,” said the chairman and CEO of Palo Alto Networks, Nikesh Arora, of the acquisition. “The addition of their technologies allows us to offer the most comprehensive security for multi-cloud environments, including Amazon Web Services, Google Cloud Platform, and Microsoft Azure, and significantly strengthens our cloud strategy going forward.”
Even with all these acquisitions, Palo Alto is sitting well financially and it is making all the pieces work.
In September 2018, Palo Alto Networks reported Q4 results that topped analysts estimates and the company has been posting 30% growth for several quarters in a row.
While that momentum cannot last forever, Palo Alto Networks is finding ways to exponentially grow its opportunities through acquisition.
Going forward, there are some good reasons to be encouraged about Palo Alto Network’s prospects. The company is forecasting that the piece of the cybersecurity market that it directly addresses will grow to $24 billion in 2020, up from just $19 billion in 2017. With all that said, it is a pure-play for cybersecurity and that comes with certain risks.
Is Cisco Worth Buying?
Cisco (NASDAQ: CSCO), on the other hand, is more diversified. Cybersecurity is only a small percentage of the company’s revenue (around 5%), but Cisco is so big that its cybersecurity segment is still bigger than Palo Alto’s entire company.
On a revenue basis, the difference is roughly 15% ($2.3 billion versus Palo Alto’s $2 billion).
One of Cisco’s biggest strengths is its ability to bundle. The company’s main business is in networking and routers, so it sells cybersecurity products as an add-on.
According to a Service Overview, Cisco bills its cybersecurity features as being a way for its customers to “take full advantage of Cisco’s powerful core networking solutions to maximize productivity, efficiency, and reduce risk.” It is a strong selling point and it is made to a captive audience. Why not choose a security product that is immediately available from a name you trust, right?
Plus, Cisco has been making some of its own purchases to fuel its strategy going forward.
In May 2018, Cisco bought Accompany, a database of senior decision makers, for $270 million.
In June 2018, the company purchased July Systems, a cloud-based and mobile platform.
In August 2018, it was Duo Security for $2.4 billion. This purchase is meant to expand Cisco’s endpoint coverage, extend is networking capabilities in different cloud environments, and simply identity awareness for its customers.
Palo Alto Networks Vs Cisco Stock Summary
Both Cisco and Palo Alto have room for growth. The question is whether Cisco stock or Palo Alto Networks stock is priced low enough to jump in.
Look at the book value of the two companies for a clue. Cisco is priced to buy at 4.84 times its book value. In comparison, Palo Alto has a price to book value of 18.74.
A high price to book (P/B) value is not unusual in the business because it is not capital intensive and it doesn’t give any weighting to value of a brand identity. For instance, Microsoft is rarely priced with a P/B of less than 10. Nevertheless, Palo Alto Network’s high P/B could indicate that its potential upside is already priced into its stock.
Buying this company is best if you believe that it will continue to experience strong growth and you may need to hold it for a couple of years to realize a return on your investment. In contrast, Cisco is priced fairly low. While it has reasons for growth, that growth will likely not be a swift as Palo Alto could experience because it is so heavily diversified. As such, it may be a better long term holding.
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.