Palo Alto Networks and CrowdStrike Rally on AI-Driven Cybersecurity Demand

It's been a good quarter for technology stocks, and cybersecurity leaders Palo Alto Networks and CrowdStrike have both joined the historic rally.

CrowdStrike and Palo Alto rallied 95% and 113%, respectively, between April and June for their best quarter on record, as new artificial intelligence tools have spiked demand for more sophisticated cyber defense. Those tailwinds allowed the sector to shake off early concerns that it would falter with the death of software as a service and emerge as a key stack in the age of AI.

Driving that demand is the onslaught of Mythos-class models capable of being used by hackers to uncover software vulnerabilities and launch full-scale attacks. That's left companies scrambling to beef up their cybersecurity defenses.

"What the Mythos moment proved is that the world, starting from the frontier AI labs themselves, realized that AI needs a cybersecurity ecosystem," CrowdStrike CEO George Kurtz told analysts earlier this month on an earnings call. "This was a Mythos inflection point."

Over the last few months, CrowdStrike and Palo Alto have positioned themselves at the forefront of the AI cyber race through Mythos, the model deemed too powerful to release to the public.

Both companies gained early access to the model as Project Glasswing partners and are early adopters of OpenAI's Daybreak. The firms have also participated in high-profile meetings between major tech giants and the White House on securing AI in this new normal.

Underpinning their success is a bet on agentic security and identity access management that started long before the threats of Mythos.

Earlier this year, Palo Alto closed its mega $25 billion acquisition of Israeli identity security company CyberArk, while CrowdStrike bet on startup SGNL.

Now, to protect their platforms from extremely capable and abundant AI agents able to conduct cyber-attacks in a matter of seconds, companies are turning to the cyber leaders for protection.

"They're the best positioned to continue to gain market share from a product perspective," said TD Cowen analyst Shaul Eyal. "They have all the necessary ingredients."

That demand is already starting to show.

Palo Alto CEO Nikesh Arora told analysts last month that over 1,200 customers reached out to discuss cybersecurity since Mythos, and that the company held 800 meetings within a six-week period.

CrowdStrike's Kurtz said this month that its Falcon Shield identity protection platform ended its fiscal first quarter with four-times annual recurring revenue growth.

"For now, there's lots of know-how that [businesses] don't have, and they would rather partner with the leaders in the market that have built business models for decades," Eyal said.

Both CrowdStrike and Palo Alto's rise to prominence has also intensified investor scrutiny, raising the bar on earnings expectations.

Earlier this month, both stocks dropped after posting strong results and upbeat AI commentary, because good wasn't good enough for investors demanding perfection.

"We worry this disappointment could continue in future quarters if investors are hoping for even more momentum to show up in growth post Mythos / Glasswing and as a result of regulatory/government pressure," wrote analysts at Bernstein.