You might think the big buzzword for cybersecurity stocks these days is "artificial intelligence." Not so. It's "platform."
Consider CrowdStrike Holdings. On the fourth quarter earnings call for CrowdStrike stock, company executives said "platform" 79 times, up from 42 times on the Q3 call. The growing importance of platforms in cybersecurity software also became highlighted when Palo Alto Networks reported its fiscal Q2 earnings report on Feb. 20.
Cybersecurity stocks took a hit on worries that Palo Alto's decision to bundle more products in discounted packages as part of a "platformization" strategy could spark an industry pricing war. As a result, cloud security platforms were also a big topic when Zscaler and CrowdStrike reported earnings in March.
Wall Street analysts tout cybersecurity stocks with platforms as the most likely market share gainers. Many companies aim to consolidate purchasing by buying from fewer security vendors, analysts say.
"A platform is the foundation for a company to build technology capabilities on, (one) that unifies multiple stand-alone functions into a single suite that is broad based in scope, best of breed, highly integrated and lower cost to operate," William Blair analyst Jonathan Ho told Investor's Business Daily.
"Enterprise companies are dealing with 70 or 80 different vendors with 200 or more total products. A platform lets them narrow down the number of vendors they work with by standardizing on a few bigger players."
TD Cowen analyst Shaul Eyal said in an email: "I would define a platform as covering end-to-end solutions to encompass the entire security stack such as: firewalls, identity, email, vulnerability management and end point."
The platform battle for cybersecurity stocks will likely be a topic at the upcoming RSA conference in San Francisco, May 6 to May 9.
How Acquisitions Build Platforms
Acquisitions are playing a big role as cybersecurity companies build cloud-based service platforms.
Palo Alto Networks has spent over $4 billion making 16 acquisitions since 2018 to build a broad cloud-based security platform.
CrowdStrike in early March acquired Flow Security. Its earlier purchases included SecureCircle, Pre-empt, Humio, Bionic and Reposify. For its part, CrowdStrike calls itself the "cybersecurity platform consolidator for the AI (artificial intelligence) era."
"We've used M&A very strategically, from the beginning we built a platform," CrowdStrike Chief Executive George Kurtz told IBD. "We were not a firewall company that had to transition into a different business model. We never had perpetual (on premise) licenses or appliances. From our perspective, what's important is that we're innovators, we started as innovators, not integrators, when it comes to M&A."
CrowdStrike competes with Microsoft and others in the "endpoint" market. Endpoint security tools detect malware on laptops, mobile phones and other devices that access corporate networks.
Now CrowdStrike is building a broad, threat-detection cybersecurity platform called XDR, or extended detection and response. It monitors endpoints as well as web/email gateways, web application firewalls and cloud business workloads.
CrowdStrike stock has gained 27% in 2024. Palo Alto stock has retreated 5%. Zscaler stock is down 12%.
Palo Alto Expands From Firewall Security
With roots in the "firewall" network security market, Palo Alto has expanded into endpoint security and other areas. Palo Alto's security operations center detects and responds to computer hacking incidents and provides threat analytics.
Ho of William Blair says Palo Alto's new product bundling strategy is similar to Microsoft's security market approach. Most Microsoft security revenue currently comes from email, endpoint and identity security. While Basic Office 365 plans offer anti-spam and malware protection, Microsoft upsells advanced anti-phishing and threat prevention tools.
"Palo Alto can use their installed base and existing product synergies as an advantage over companies that are building a single point solution. The bundling/discounting allows a customer to derive significant value and makes it more difficult to swap out single products one-by-one because now you are purchasing a bundle from Palo Alto and saving money on the whole thing."
Cybersecurity Stocks: SASE Market Growing
In addition, Palo Alto is a newcomer to cloud-based Secure Access Service Edge, or SASE.
Secure Access Service Edge originally took off as businesses scrambled to maintain their corporate networks after the sudden shift to remote work during pandemic lockdowns.
Now companies are layering on more security products to SASE infrastructure, such as "zero trust." It enables firms to verify the identities of network users and manage access to applications.
San Jose, Calif-based Zscaler is one of the biggest SASE providers. The company provides cloud-based services via 150 data centers worldwide.
"I'm very comfortable with our platform story," Zscaler Chief Executive Jay Chaudhry said on the company's January quarter earnings call with analysts.
"I think a platform keeps on growing," he said. "We started with outbound traffic, now inbound traffic. The platform must have the most comprehensive data protection. None of these firewall vendors can do a lot of data protection. Data protection starts with a proper SASE architecture."
According to Dell'Oro Group, the SASE market grew 31% in 2023 to $8.4 billion.
Meanwhile, Zscaler on March 14 acquired AI startup Avalor to beef up its Zero Trust capabilities. In 2023, Zscaler purchased Canonic Security, an application security provider.
Private Companies In Cloud Cybersecurity
Private companies Netskope, Cato Networks and Wiz are also players in the SASE market. Further, Wiz reportedly is seeking to raise $800 million at a $10 billion valuation. Also, Cato is expected to launch an initial public offering within a year.
In the broader cloud computing cybersecurity market, fast-growing private companies also include Snyk, Lacework, Cybereason, Aqua Security, and Orca Security. Some analysts call it the cloud-native application protection platform, or CNAPP, market.
With its purchase of PingSafe in January, SentinelOne entered the CNAPP market. In 2023, SentinelOne's marketing pact with Wiz was phased out.
In general, public cybersecurity companies hold an edge building broad cloud platforms because they have legacy products and the ability to use equity or cash for acquisitions. Snyk, though, has acquired three companies — Heliosphere, Enso Security and Fugue.
While platforms are a new buzzword in cybersecurity, it's been a trend in the broader software market. Big companies like Salesforce, ServiceNow and Workday leverage broad software platforms in marketing.
Follow Reinhardt Krause on X, formerly Twitter, @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
