Better Cybersecurity Stock: Palo Alto Networks vs. SentinelOne

The cybersecurity sector is a compelling industry to invest in. Customer demand remains strong, and cyberattacks show no signs of slowing down. The intense cyberattack on Chinese artificial intelligence start-up DeepSeek in January and the hack of the U.S. Treasury Department in December are just two recent examples.

Two prominent cybersecurity providers that investors should consider adding to their portfolios are Palo Alto Networks (NASDAQ: PANW) and SentinelOne (NYSE: S). The former is the largest cybersecurity company by market cap. The latter has placed AI at the core of its platform since its 2013 founding. Both are strong players -- but which one comes out on top as the better cybersecurity investment for the long haul?

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The case for SentinelOne

SentinelOne differentiates itself from competitors with the autonomous nature of its AI platform, which allows it to respond to attacks faster, and to automatically scale up its response when threats proliferate. SentinelOne's platform also requires no software updates, while competitors perform these frequently, which introduces risks. The nature of those risks became apparent last year when rival CrowdStrike released an update to its cybersecurity software that contained a glitch that knocked vast numbers of Windows machines offline, causing a global IT outage.

The strength of SentinelOne's platform enabled it to grow its revenues 28% year over year to $210.6 million in its fiscal third quarter, which ended Oct. 31. That growth got a boost from CrowdStrike's misstep. "We achieved a record number of customer wins against our closest competitor in Q3," SentinelOne CEO Tomer Weingarten stated.

Management expects to report that sales growth continued in its fiscal Q4, projecting revenue of $222 million, up from the prior-year period's $174.2 million.

Yet the company is not profitable. In fiscal Q3, it booked a net loss of $78.4 million as its sales and marketing spending ballooned 26% year over year to $123.7 million. The company is aggressively spending in these areas to drive revenue growth.

The case for Palo Alto Networks

Palo Alto Networks uses AI in its solutions, but its big push is into a strategy it calls platformization -- getting customers to adopt a single platform for all their cybersecurity needs.

The company sees platformization as inevitable, based on the premise that customers will eventually want to consolidate their cybersecurity spending. Currently, the market is swamped with players, and businesses may end up buying more than a dozen different cybersecurity services from various vendors, which don't always work in concert to stop attacks.

Based on the results from its fiscal 2025 first quarter, the platformization strategy is working. Palo Alto Networks' sales grew 14% year-over-year to $2.1 billion in the period, which ended Oct. 31. In addition, annualized recurring revenue (ARR) grew 40% to $4.5 billion. More than half of that came from customers who adopted platformization. ARR measures the total revenue the company collects from its customer contracts over an annual period. Palo Alto Networks is targeting ARR of $15 billion by its fiscal 2030.

The company also managed its costs well, enabling fiscal Q1 net income to hit $350.7 million, an 81% increase from the prior-year period's $194.2 million.

Choosing between the stocks

The choice between Palo Alto Networks and SentinelOne is not clear-cut. Both recently demonstrated the strength of their cybersecurity solutions with year-over-year double-digit percentage sales growth.

So let's take a look at each stock's valuation using the price-to-sales (P/S) ratio, which measures how much investors are willing to pay for every dollar of revenue. This metric is frequently employed to evaluate businesses that are not yet profitable, such as SentinelOne.

Data by YCharts.

SentinelOne has the lower P/S multiple at the time of this writing, indicating it's a better value. That said, Palo Alto Networks warrants a higher valuation since it's profitable, and those profits are growing.

Palo Alto Networks' 81% year-over-year net income growth in Q1 led to a substantial increase in diluted earnings per share (EPS). The company's Q1 EPS of $0.99 was nearly double the prior-year period's $0.56. Its solid financials are enabling it to thrive against rivals in a highly competitive space. This, combined with a platformization strategy that's helping it increase ARR, makes Palo Alto Networks the superior long-term cybersecurity investment.

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Robert Izquierdo has positions in CrowdStrike, Palo Alto Networks, and SentinelOne. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.