Stock Analysis & Ideas

Ahead of Earnings, Which is the Best Cybersecurity Stock?

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Despite macro challenges, Wall Street analysts remain optimistic about cybersecurity companies based on the strong demand for their products amid rising threats. In this article, we’ll discuss three cybersecurity companies: Zscaler, Palo Alto, and CrowdStrike, and look at the expectations for their upcoming results.

Cyber attacks have been on the rise amid increasing digitization and the rapid transition to the cloud. As per Check Point (CHKP), the average weekly cyber attacks increased 32% year-over-year globally in the second quarter of 2022. Also, ransomware impacted one out of 40 organizations worldwide in Q2. While macro challenges are expected to impact IT spending, spending on cybersecurity is expected to be more resilient than other categories. With this backdrop, we used the TipRanks Stock Comparison tool to place Zscaler, Palo Alto, and CrowdStrike against each other to pick the most attractive cybersecurity stock. 

We’ll look at the analysts’ outlook for these stocks as these companies are scheduled to report their results in the weeks ahead.  

Zscaler (NASDAQ: ZS)

Zscaler is one of the leading players in the zero-trust security space, with its Security Service Edge (SSE)-based Zero Trust Exchange product distributed in over 150 data centers worldwide.

Zscaler’s revenue grew 63% to $287 million in the third quarter of Fiscal 2022 (ended April 30, 2022). Adjusted earnings per share (EPS) increased by 13% to $0.17. The company’s market-beating results reflected solid demand for its cloud-native Zero-Trust platform.

It’s worth noting that Zscaler’s dollar-based net retention rate has exceeded 125% for the past six quarters. The net retention rate reflects the company’s ability to retain and expand the recurring revenue from its existing customers. What’s more, Zscaler continues to focus on acquiring business from large enterprises. At the end of fiscal Q3, the number of customers contributing annual recurring revenue (ARR) of over $1 million increased 77% to 288 customers.

Zscaler is expected to report its fiscal fourth quarter results on September 8. Analysts expect the company’s adjusted EPS to rise 50% year-over-year to $0.21

Last week, Guggenheim analyst John DiFucci initiated coverage of Zscaler with a Buy rating and a price target of $233. DiFucci is confident that Zscaler will deliver Annual Recurring Revenue (ARR) of $5 billion in just over four years. The analyst sees upside potential to revenue consensus estimates, both in the near-term and long-term, with or without the inclusion of revenue from the recently launched products or future launches.

All in all, Zscaler scores a Strong Buy consensus rating based on 20 Buys and three Holds. At $208.18, the average Zscaler stock price prediction implies 16.56% upside potential from current levels. 

Palo Alto Networks (NASDAQ: PANW)

Palo Alto has rapidly evolved from an on-site firewall provider to a company offering a suite of cybersecurity solutions across the cloud, networks, and mobile devices.

Palo Alto’s revenue for Q3 FY22 surged 29% to $1.39 billion, with billings rising 40%. Adjusted EPS grew 30% to $1.79 as the company’s productivity efforts helped it mitigate the impact of higher costs. The company raised its full-year guidance following its stellar Q3 performance.

Palo Alto continued to win large contracts in Q3, with the number of million-dollar-deals signed in the quarter increasing 65% year-over-year.  Also, the number of $5 million deals grew 73%.

Palo Alto will announce its fiscal fourth quarter results on August 22. Back in May, the company guided for Q4 revenue growth in the range of 25% to 27%. Further, it expects adjusted EPS between $2.26 and $2.29. Wall Street analysts expect Palo Alto’s Q4 adjusted EPS to come in at $2.28, up 42.5% year-over-year.  

Earlier this month, Wolfe Research analyst Joshua Tilton initiated coverage of Palo Alto with a Buy rating and a price target of $700. Tilton stated that Palo Alto stock is a “consensus long as investors look to hide out in security names that can deliver both growth and free cash flow margins at an attractive valuation.”

Tilton finds Palo Alto stock attractive at current valuation levels. The analyst believes that the company is “so much more than just firewall, and it’s not getting credit for it.”

Overall, the Street has a Strong Buy consensus rating on Palo Alto stock based on 23 Buys and one Hold. The average Palo Alto price target of $630.63 implies 20.22% upside potential from current levels.  

CrowdStrike Holdings (NASDAQ: CRWD)

CrowdStrike is a leading cloud-native cybersecurity company that delivers endpoint and workload protection through its Falcon platform.

For the first quarter of Fiscal 2023 (ended April 30, 2022), CrowdStrike’s revenue surged 61% to $488 million. Adjusted EPS jumped 210% to $0.31. The company ended the quarter with an ARR of $1.92 billion, up 61% year-over-year.

CrowdStrike is scheduled to announce its fiscal second-quarter results on August 30. Analysts expect the company’s adjusted EPS to come in at $0.28. Meanwhile, the company’s guidance indicates Q2 adjusted EPS in the range of $0.27 to $0.28, compared to $0.11 in the prior-year quarter.  

Recently, Stifel analyst Brad Reback completed an annual survey of CrowdStrike’s customer base, which included nearly 50 enterprises of different sizes.

Based on the survey, Beck concluded that customers were “very satisfied” with CrowdStrike’s product portfolio and a major chunk of the respondents expect to boost their spending on the company’s products in the upcoming quarters or years.

Beck stated that the annual survey strengthened his “confidence in CrowdStrike’s multi-module adoption trajectory” and the rising demand for the company’s products for endpoint security and non-traditional workloads, mainly cloud.  

In line with his bullish thesis, Beck raised his price target on CrowdStrike stock to $220 from $205 and maintained a Buy rating.

Other analysts also agree with Beck, with CrowdStrike scoring a Strong Buy consensus rating based on an impressive 22 unanimous Buys. The average CRWD price target of $230.41 suggests 14.97% upside potential from current levels.

Conclusion

Despite a tough macro backdrop, Wall Street analysts are bullish on Zscaler, Palo Alto, and CrowdStrike due to the solid demand for cybersecurity solutions. So far this year, Palo Alto and CrowdStrike stocks have fared better than Zscaler. Currently, analysts see slightly higher upside potential in Palo Alto stock.

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