$PANW and $FTNT: The Value Firewall Threat to PANW's Growth

...and some lessons learned along the way

When I was first coming up to speed on the cybersecurity space back in 2017, I remember hearing a lot of talk in the investment community about how the firewall market was dying at the hands of the cloud. The narrative was that nobody was going to need hardware based appliances, and even the virtualized ones weren’t going to be helpful for customers running workloads in AWS and Azure (GCP wasn’t really on the radar at that time). I spent a lot of time working to understand why that was the case, and by and large, I came to agree with that sentiment.

Yet despite this mass migration of applications to the cloud by enterprises the world over, PANW and FTNT are two of the strongest stocks in the security space. It turns out some part of the narrative was wrong. The truly surprising thing isnt’ that these two companies have managed to survive mass cloud migrations. It’s the fact that firewalls continue to be the biggest aspects of their businesses, and more importantly, this is where the most significant battle between these two vendors is being waged today- five years after the investment community thought firewall growth would have died off already. There is a lesson here- Don’t Trust the Narrative, Narratives Change.

For those familiar with PANW, the inclination might be to assume the investments they’ve made in acquiring and building new cloud products are fueling their growth. If we were to stop there and take it at face value - more cloud workloads equals more growth for a security company with a lot of cloud products - we’d be right, but as it turns out, actually more wrong than right because PANW is still a very firewall dependent company. Last year they grew revenue 29% YoY, but 2/3** of that growth came from their firewall business.

**I don’t want to suggest this is something management is trying to obfuscate in their numbers, but they have changed the way they do revenue breakouts in their reports several times over the past couple of years, and this number has been tougher to get to over time. I’m not the only investor annoyed by this, so please don’t get discouraged if you are just now diving into PANW.

Then you have FTNT, who has grown their Enterprise business to about 40% of revenue, from less than 20% five years ago. No easy feat for a security company starting out as an SMB and Mid-market vendor, and with few cloud products in their portfolio.

So we have on one hand, PANW, with a primarily Enterprise security business, investing heavily across product, sales, and marketing in its cloud security solutions. It has no real Secure SD-WAN (the convergence of security and networking) or OT security (commerical IoT) story.

On the other, we have FTNT, very focused and invested in Secure SD-WAN and OT security, with little cloud security story, and a majority SMB and Mid-market customer base (albeit with a fast growing Enterprise business).

When we look at the two businesses this way, they seem to swim in different lanes… with the exception of their core firewall business, and that is what’s so fascinating about them. There is also another lesson here- Do the Work. Without understanding this breakdown, it’s easy to miss what’s currently happening between them. They’ve not only collectively wrecked the “firewall is dead” narrative, customers are actually deciding which vendor to work with on the basis of TCO of their firewall deployments. All of the investments PANW and FTNT have made in other aspects of their businesses have certainly helped their growth, but at the end of the day, customers still need firewalls, and they’re picking the best firewalls they can get for the price. The interesting thing about the investment FTNT has made in Secure SD-WAN is that it has further increased the value proposition of FTNT’s firewall, without requiring a separate product offering. They’ve taken two products and combined them into one.

So why does this matter?

Budgets are getting tighter this year across the board. PANW and FTNT have both done multiple price increases over the past couple of years, but FTNT is still the value firewall between the two of them, and FTNT’s aforementioned growth in Enterprise business it starting to encroach upon PANW’s. It took a while, but the swim lanes are converging, and FTNT is taking share of the firewall market from PANW. If we were still under the impression PANW’s growth was primarily being driven by its cloud product portfolio, we may not think losing firewall share to FTNT is that material to their business, but since we’ve done the work, we now know that is not the case.

I’m not in the business of making predictions. I think given the recent run up in stock prices, FTNT and PANW are both facing very high expectations from investors this quarter, at a time when customers are taking more time to make decisions and digest current projects before making big investments in new ones. The point is really that if FTNT continues to take firewall market share from PANW, this will certainly impact PANW’s business and therefore its stock price, and I think that’s a point many investors may overlook.

FTNT’s value firewall is an imminent threat for PANW, one that is more imminent than PANW management would like to admit to investors.