Cloudflare versus Palo Alto Networks

  • Cloudflare has faster organic growth with structural drivers, and higher average gross margin leveraging an owned network. PANW has better operating margin attributed to its larger scale.
  • Cloudflare is the stronger business for the next 5 to 10 years, narrowly: Palo Alto Networks wins today on margins and contract lock-in, but Cloudflare's growth is organic and architectural while PANW's is increasingly bought.
  • The load-bearing fact: at Cloudflare's current size, PANW had the same cost structure (S&M 52% of revenue, operating margin minus 10% in FY2017), so the 20-point margin gap is mostly scale, while the growth gap (about 35% organic vs about 14%) comes from things PANW cannot buy: a global network carrying a quarter of all websites and the agent traffic now running over it.
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