Palo Alto Networks, Inc.PANW and Cloudflare, Inc. NET are both at the forefront of the cybersecurity space, playing key roles in guarding organizations from extensive cyberattacks. PANW focuses broadly on next-generation firewalls, cloud security and AI-driven threat detection. Cloudflare provides a cloud-native platform spanning network security, application security and connectivity.Both PANW and NET are riding key industry trends, driven by the mounting incidents of credential theft, remote desktop protocol breaches and social engineering-based strikes by malicious actors. However, from an investment point of view, one stock offers a more favorable outlook than the other right now. Let’s break down their fundamentals, growth prospects, market challenges and valuation to determine which stock offers a more compelling investment case.The Case for PANW StockPalo Alto Networks remains a cybersecurity leader, offering solutions for network security, cloud security and endpoint solutions for customers who need full enterprise security support. Its next-generation firewalls and advanced threat detection technologies are widely recognized and adopted globally.Palo Alto Networks’ wide range of innovative products, strong customer base and growing opportunities in areas like Zero Trust, Secure Access Service Edge (SASE) and private 5G security continue to support its long-term growth potential. For instance, the company’s SASE bookings grew 40% in fiscal 2026, supported by growth across Access, SD-WAN and secure browser. PANW displaced legacy vendors in nearly 100 customer accounts, representing more than $400 million in total contract value. The displacement volume was nearly double that of the prior year.PANW’s SASE business is benefiting from strong customer demand for cloud-delivered networking and security solutions as enterprises continue to support hybrid work environments and secure access to cloud applications. The company integrates SASE with its firewall, SD-WAN and other security products, allowing existing customers to add SASE without bringing in another vendor. Management said this makes platform standardization a simpler choice for customers. In the fourth quarter of fiscal 2026, a global telecom leader signed a $126 million agreement to expand its next-generation firewall footprint while replacing legacy proxy providers with Prisma Access for SASE.However, PANW’s non-GAAP gross margin fell 100 basis points year over year to 74.8% in the fourth quarter of fiscal 2026, while non-GAAP gross margin for fiscal 2026 declined 60 basis points to 75.8%. The decline was mainly due to the growing mix of SaaS offerings, which are still scaling toward mature margin levels. Management expects cloud hosting costs to grow faster than revenues in fiscal 2027, which could weigh on gross-margin expansion.Further, Palo Alto Networks expects higher commodity costs, particularly for memory and storage, to persist in its hardware business. While strong demand for its Gen 5 firewall appliances remains positive, higher component costs could weigh on hardware profitability.The Case for NET StockCloudflare is seeing rising demand for its cybersecurity offerings as businesses face an increase in Internet vulnerabilities and evolving cyber threats. The growing use of AI is helping security researchers identify vulnerabilities faster, increasing the need for stronger protection.During its third-quarter 2026 earnings call, management highlighted that six of the most serious Internet security vulnerabilities had been disclosed in less than 14 days. Cloudflare said it receives early disclosures of vulnerabilities from major AI labs and security companies and puts protections in place for its customers before these issues become public. This growing need for protection is encouraging more businesses to turn to Cloudflare for cybersecurity solutions.The company is also securing larger customer contracts for its security offerings. During the third quarter of 2026, a U.S. federal department signed a five-year, $10.3 million contract for Cloudflare’s SASE portfolio. The department selected Cloudflare to replace its legacy Virtual Private Network system and chose it over a first-generation Zero Trust provider. In another win, a multinational neobank signed a three-year pool-of-funds agreement with an average annual contract value of more than $3 million.Cloudflare is also gaining ground against traditional Zero Trust providers as businesses look for security platforms that can protect both employees and AI agents. As companies prepare to deploy more AI agents, they need solutions that can manage identities and control access to enterprise systems. Cloudflare believes its integrated platform, which combines network security, application protection and Zero Trust services, gives it an advantage over vendors offering more limited solutions.With rising cyber threats, stronger enterprise adoption and increasing demand for Zero Trust and SASE solutions, Cloudflare is well-positioned to expand its security business. Continued customer wins and greater adoption of its broader platform could support its long-term revenue growth.CRWD vs. NET: Which Has the Stronger Growth Outlook?Both companies will benefit from the surging demand for cybersecurity, but Cloudflare’s growth profile appears stronger in the long term.The Zacks Consensus Estimate for Cloudflare’s 2026 revenues and EPS indicates a year-over-year surge of 36.5% and 37.6%, respectively. For 2027, top and bottom lines are projected to grow 30.8% and 36.7%, respectively.Image Source: Zacks Investment ResearchIn contrast, Palo Alto Networks’ fiscal 2027 estimates point to more modest growth, with revenues and EPS indicating a year-over-year increase of 23.4% and 8.8%, respectively. For fiscal 2028, top and bottom lines are both projected to grow 15% and 17.5%, respectively.Image Source: Zacks Investment ResearchPANW vs. NET: Price Performance and ValuationYear to date, shares of PANW and NET have surged 59.4% and 39.5%, respectively.PANW Vs. NET: YTD Price Return PerformanceImage Source: Zacks Investment ResearchCurrently, NET is trading at a forward sales multiple of 29.49X, significantly higher than PANW’s forward sales multiple of 18.09X. NET’s higher valuation reflects strong investor confidence in AI security demand, putting it above PANW in terms of valuation, reflecting the high growth expectations of the company in the long term.PANW vs. NET: Forward 12-Month P/S RatioImage Source: Zacks Investment ResearchConclusion: Buy NET, Hold PANW Right NowBoth Palo Alto Networks and Cloudflare are key players in the cybersecurity space, but their near-term outlooks are quite different. Currently, PANW continues to face pressure from lower gross margins, while higher cloud hosting and hardware costs could limit margin improvement. In contrast, Cloudflare continues to benefit from strong demand for AI security, SASE and Zero Trust solutions. Further, NET’s valuation reflects high growth expectations, as Cloudflare remains well positioned to benefit from rising AI security demand over the long term.Currently, NET carries a Zacks Rank #2 (Buy), making the stock a better pick compared to PANW, which has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Zacks’ Research Chief Names “Stock Most Likely to Double”Our team of experts has just released the 5 stocks with the greatest probability of gaining +100% or more in the coming months. Of those 5, Director of Research Sheraz Mian highlights the one stock set to climb highest.Of course, all our elite picks aren’t winners, but this one could far surpass earlier Zacks’ Stocks Set to Double like D-Wave Quantum, which shot up +680.1%.Free: See Our Top Stock And 4 Runners UpThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment Research
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