CrowdStrike vs. Palo Alto Networks — why Wall Street values these stocks so differently

CNBC

2 days ago

Here's our Club Mailbag email [e-mail] — so you send your questions directly to Jim Cramer and his team of analysts. We can't offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries. This week's question: When I look at the forward P/E ratio of CrowdStrike, I wonder if this isn't too elevated when compared to PANW? Thanks, Joao There is no doubt that CrowdStrike carries a demanding price-to-earnings multiple of 125 times next 12-month earnings-per-share estimates versus its cybersecurity peer Palo Alto Networks ' cheaper forward P/E of 54. However, whether CrowdStrike's P/E is "elevated" compared to Palo Alto Networks is subjective and comes down to what you, the investor, want to pay for future earnings. Both are Club names. The price-to-earnings ratio is a standard way to gauge whether a stock is undervalued, fairly valued, or overvalued when compared to historical performance, industry peers, growth rate, or the broader market. The P/E ratio is calculated by dividing a stock's current share price by earnings per share (EPS). While there are many different ways to look at P/Es, the two most common are on a trailing 12-month basis (actual EPS for the past four quarters) and a forward 12-month basis (estimated EPS for the next four quarters). We prefer forward P/Es because we're more interested in where earnings are going rather than where they've been. We want to weed out companies that are not growing from our investment choices. A higher P/E means investors are willing to pay more for each dollar of earnings, usually because they expect to see faster growth in the future. So, in the case of CrowdStrike versus Palo Alto Networks, what the market is telling us is that investors are willing to pay much more for the former's earnings. That dynamic is reflected in the incredible appetite for CrowdStrike shares, which have gained more than 40% year to date and hit an all-time intraday high of $484 on Tuesday. It will be put to the test after the closing bell when CrowdStrike reports earnings. Palo Alto stock has been no slouch this year — increasing more than 8% year to date and outperforming the S & P 500 's gain in 2025 of roughly 1.5%. CRWD PANW YTD mountain CrowdStrike vs. Palo Alto Networks YTD Investors are paying a premium for CrowdStrike because they believe it's growing faster and has more potential. CrowdStrike is primarily a software subscription model, and investors tend to pay up more for these kinds of recurring sales because they lead to higher margins over time. Palo Alto is a mix of hardware, which tends to be more cyclical and subject to lower multiples, and software. The company has been making strides in its focus on platformization — being a one-stop shop for all cybersecurity needs. To be sure, neither stock is particularly cheap when layering growth expectations, according to the PEG ratio, which takes the P/E and divides it by a company's projected long-term earnings growth rate. Based on the next three years of earnings estimates, we calculated a three-year earnings compounded annual growth rate (CAGR) estimate of 16.6% for CrowdStrike and 11.9% for Palo Alto. That translates to PEG ratios of 7.5 for CrowdStrike and 4.5 for Palo Alto. As a general rule, a PEG ratio of 1 or lower indicates getting good value for future growth. On the high side, a PEG of 2 or above suggests paying up for future growth. Yes, both stocks are expensive by this measure, but these two leaders in cybersecurity have earned this premium over time. Cybersecurity has proven to be one of the most attractive sub-sectors of tech to invest in because it is mission-critical for organizations of all sizes. The secular growth characteristics and software aspect make it even more appealing. Bottom line Jim Cramer does not prefer CrowdStrike over Palo Alto Networks — both are long-term holdings in the portfolio and leaders in the cybersecurity industry. When we initiated CrowdStrike in October 2024, we viewed it as a turnaround following a botched software update that touched off a global IT outage in July 2024. We thought the risk was manageable after CEO George Kurtz fought to reassure clients. The company did not lose a lot of business. Jim has said that Palo Alto Networks' platformization strategy under CEO Nikesh Arora remains one of the great secular growth stories of all time. The Club started a position in February 2023. (Jim Cramer's Charitable Trust is long PANW, CRWD. See here for a full list of the stocks.) 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