Cloudflare vs. Palo Alto Networks: Which Cybersecurity Stock Is the Better Buy?
Key Points
Cloudflare is growing faster but still faces operating losses, and its revenue growth could begin to decelerate.
Palo Alto Networks is a more mature company with better margins and is using acquisitions to gain market share.
The gap in price-to-sales ratios is massive between these two companies, and investors should keep that in mind.
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Cybersecurity has been a hot industry for several years, with Grand View Research projecting an 11.9% compound annual growth rate (CAGR) through 2033. However, artificial intelligence (AI) is heating up the need for cybersecurity.
Each AI agent and model needs cybersecurity. Furthermore, hackers can use AI to hack more targets, and cybersecurity companies use AI to deter those attackers.
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Cloudflare (NYSE: NET) and Palo Alto Networks (NASDAQ: PANW) are at the forefront of this opportunity. They both generate annual recurring revenue from leading companies, but there are a few things to consider when comparing these stocks.
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Palo Alto has better margins and is more mature
Palo Alto Networks is the most established cybersecurity platform. It earned $3 billion in its fiscal 2026 third quarter, ended April 30, while Cloudflare only generated $696.1 million in the second quarter. It is also profitable, while Cloudflare is still burning through cash. Although its fiscal 2026 third quarter wasn't profitable, that was mainly due to merger and acquisition (M&A) expenses. It had been profitable in the first and second quarters of its fiscal 2026.
Cloudflare continues to report operating losses. A generally accepted accounting principles (GAAP) loss equivalent to 30% of revenue in the second quarter was higher than usual due to one-time severance costs. Q1 does not reflect severance and yielded an operating loss equal to 10% of total revenue.
Cloudflare is growing faster
Cloudflare's strength in this comparison is the fact that it's growing faster without leaning heavily into acquisitions. For instance, Cloudflare delivered 36% year-over-year revenue growth in this quarter, compared to Palo Alto Networks' 31% growth rate.
However, the advantage skews more toward Cloudflare when reading the fine print. Palo Alto Networks' revenue growth is partially fueled by its recent acquisitions of CyberArk and Chronosphere, which contributed $388 million of the company's $3 billion in sales in the quarter. That's more than 10% of total revenue that came from acquisitions instead of organic growth.
If Cloudflare can maintain elevated growth rates and scale margins quickly once it becomes profitable, then it has a real shot at outperforming Palo Alto Networks in the long run.
Not all investors are banking on that scenario. Palo Alto Networks has comfortably outpaced Cloudflare in year-to-date returns, and valuation differences may explain why. Palo Alto Networks trades at a high 25 price-to-sales ratio, but that level is pretty low compared to Cloudflare's 41 P/S ratio. Higher growth rates also come with higher expectations, and a lot of future growth is already priced into Cloudflare shares.
Which stock is the better buy?
Cloudflare and Palo Alto Networks provide critical cybersecurity solutions to the world's largest companies. As the AI build-out intensifies, these companies will experience heightened demand for cybersecurity solutions.
Palo Alto Networks is the better-known name in the industry and is more suitable for investors who want to incur less risk. If Cloudflare achieves profitability and quickly scales it, the company may be a better buy.
Although Cloudflare is growing faster, its growth rate will eventually decelerate. That has been the common pattern for many maturing cybersecurity and tech companies. This risk also affects Palo Alto Networks, but it has a far more reasonable valuation than Cloudflare.
Even though Palo Alto Networks has already outpaced Cloudflare, it's likely that the trend will continue. The recent acquisitions have boosted Palo Alto Networks' market share in the cybersecurity industry.
Palo Alto Networks also has projected sequential growth on its side. The company guided for $3.35 billion in fiscal Q4 revenue at its midpoint, which implies a 12% sequential gain. Cloudflare's guidance pointed to $736.5 million at the midpoint, which only suggests a 6% quarter-over-quarter boost.
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Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
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