According to BBC, Israeli cybersecurity firm Wiz turned down a highly tempting takeover offer from Google.
But why now, of all times? This happened right after a widespread Global IT Outage caused by CrowdStrike(CRWD), a leader cybersecurity firm. CRWD has always been known for its top-notch cybersecurity technology in Cloud Workload Security and Endpoint Security.
Wiz’s CEO commented, “While we are flattered by offers we have received, we have chosen to continue on our path to building Wiz.” This decision seems to show Wiz’s confidence in expanding their market position and growing their company value, especially now when CRWD is struggling.
Many analysts believe that the global “blue screen” incident, triggered by CRWD’s update, opens investment opportunities for competitors. If Wiz sees the outage as a chance to grow, it could also be a significant opportunity for Palo Alto Networks (PANW), the top company in the cybersecurity sector by market capitalization, to expand its market share.
An Analyst Predicted CRWD’s Stock Drop a Day Before the Outage
On July 18, Thursday, Redburn-Atlantic analyst Marques downgraded CRWD’s target price from $380 to $275. The next day, CRWD’s update caused a Global IT Outage, and CRWD’s stock plummeted about 25% to around $260. Marques did not foresee the global disruption due to a conflict between CRWD’s Falcon software and Microsoft’s Windows and Azure operating systems. However, this incident caused CRWD to lose its technical reputation and price competitiveness. As a result, CRWD’s stock plummeted, reaching the target price level that Marques had set.
Why Did Redburn-Atlantic Downgrade CRWD’s Target Price?
The downgrade came from concerns that CrowdStrike’s revenue growth might not keep up with the stabilizing endpoint market and potential budget pressures. Redburn-Atlantic said that analysts’ consensus revenue growth expectations for CrowdStrike seemed to overlook the endpoint market’s stabilization and potential deflationary impacts from Generative AI. Redburn-Atlantic also pointed out intense competition in CrowdStrike’s business areas, like cloud, identity, and Security Information and Event Management (SIEM), particularly from giants like Microsoft(MSFT) and Google(GOOGL).
PANW’s Stock History: Is the Cybersecurity Market Slowdown Real?
On the same day, Redburn-Atlantic Analyst also adjusted their investment rating on PANW from buy to neutral. The analyst cited ongoing slow growth in AI-benefited stocks related to cybersecurity, reduced IT spending by companies, deflationary impacts from generative AI, and competitive pressures as reasons for downgrading Palo Alto Networks’ revenue outlook.
Looking at PANW’s stock history and earnings reports, we can see PANW experiencing slowdowns in corporate spending. In February, the stock dropped 28% after announcing FY24 Q2 earnings, and it fell another 8% after FY24 Q3 earnings in May. The entire cybersecurity sector, including CRWD, ZS, and FTNT, also saw their stocks drop about 10% on average after PANW’s CEO Arora cited IT budget optimizations and “spending fatigue” as concerns, leading to lowered guidance.
Interestingly, it seemed CRWD defied these spending concerns by reporting strong FY25 Q1 results in June and raising its Q2 guidance, causing its stock to rise about 12%. This was further boosted by its inclusion in the S&P 500, driving the stock up another 10% in a week. However, the stock has now plummeted following the Global IT Outage.
So, is PANW’s drop a temporary adjustment or a reflection of slowed growth?
Depending on how you view the market’s growth and the company’s business strategy, this might be a buying opportunity due to a short-term correction. PANW CEO Arora stated that they lowered their guidance to restructure the business model through platformization, emphasizing that cybercrime is at an all-time high, and the lowered guidance is not due to decreased cybersecurity demand. Therefore, we need to examine the business strategy they are pursuing despite lowering their guidance and see if it will yield long-term success.
PANW’s Business Strategy: Is Platformization Effective?
Revenue Growth and Platformization Strategy
The chart from the earnings report shows that PANW’s billing growth rate dropped from 26% in FY23 and 16% in FY24 to about 3%. While billing amounts continue to rise, the growth rate has slowed significantly. However, with PANW’s new platformization strategy, the key performance indicators to watch are RPO (Remaining Performance Obligation) and ARR (Annual Recurring Revenue) rather than billing figures.
PANW’s platformization strategy involves providing an all-encompassing cybersecurity solution to corporate clients. PANW believes selling individual cybersecurity modules lacks persuasiveness because clients perceive limited improvements in security at higher costs. In contrast, a comprehensive security platform offers broad security services while reducing costs. PANW’s integrated security platform, XSIAM, leverages AI for real-time threat detection and response, protecting both cloud and on-premises environments.
PANW aims to expand ARR through platformization, securing long-term steady income by extending contract periods and preventing customer churn. By converting existing customers to the integrated platform and targeting over 5,000 corporate clients, PANW aims to achieve $15 billion in ARR by FY30.
This platformization strategy has two significant advantages if successful: it stabilizes revenue by securing fixed clients and expands market share through long-term customer retention.
Is the Platformization Strategy Effective in the Market?
Barron’s May article reported that PANW’s platformization strategy is driving market share growth. CEO Arora aims to increase market share from 5% to 20%. PANW plans to acquire IBM’s QRadar SaaS assets and intellectual property, intending to migrate QRadar’s on-premises customers to XSIAM. This transaction is expected to close in September. The partnership with IBM seems strategic in rapidly expanding corporate client bases amid fierce competition. Utilizing IBM’s AI and data analytics models could strengthen the integrated security platform’s technology and expand the customer list through IBM’s security consulting network.
Is the Global IT Outage Beneficial for PANW?
If Google had successfully acquired Wiz and internalized their cybersecurity technology, the total market pie available for PANW and CRWD would have shrunk. But, at the same time, PANW and CRWD’s influence in the non-Google market might have increased. competitors would have gained influence. Ultimately, Wiz rejected Google’s offer, opting to continue as a fast-growing cybersecurity firm. Established in 2018, Wiz is considered a comprising company in Cloud Workload Security, following CRWD, PANW, and MSFT. The cybersecurity market remains competitive.
During this time, CRWD, which was renowned for having the world’s best cybersecurity technology, made a simple mistake that led them into deep trouble. If PANW capitalizes on CRWD’s turmoil with aggressive marketing and aligns with corporate IT spending constraints and platformization strategy, PANW could increase its ARR and potentially restore its stock’s upward momentum. Marques previously doubted the feasibility of the FY26 revenue consensus formed by rapid platform shifts, but the recent IT Outage could enhance the likelihood of this scenario.
Despite any temporary slowdown in the cybersecurity market, the frequency and sophistication of cyberattacks continue to increase.
*Reference Palo Alto Networks, Seeking Alpha, Stock Analysis, CNBC, BBC, Barron’s