Info@NationalCyberSecurity
Info@NationalCyberSecurity

Better Cybersecurity Stock: Zscaler vs. Fortinet | #hacking | #cybersecurity | #infosec | #comptia | #pentest | #ransomware


Zscaler (ZS 0.73%) and Fortinet (FTNT 2.43%) are both leading cybersecurity companies, but they operate very different business models. Zscaler specializes in “zero trust” services, which treat everyone — including a business’s CEO — as a potential threat. Instead of installing cumbersome appliances, it provides all of its tools as cloud-native services, which are stickier and easier to scale as a company grows.

Fortinet is an older, larger, and more diversified cybersecurity specialist that protects organizations with a mix of on-site appliances and cloud-based services. It originally developed next-gen firewalls, and it subsequently expanded its ecosystem into a “Security Fabric” that provides end-to-end cybersecurity services for on-premise, cloud-based, and Internet of Things (IoT) devices. It differentiates itself from many other cybersecurity companies by developing its own proprietary chips.

Image source: Getty Images.

Over the past 12 months, Zscaler’s stock rallied 65%, but Fortinet’s shares only rose 5%. Let’s see why the former outperformed the latter by such a wide margin — and whether it’s still the better buy.

Zscaler is still growing in a challenging market

In fiscal 2023 (which ended last July), Zscaler’s revenue rose 48% to $1.62 billion, its adjusted operating margin expanded from 10% to 15%, and its adjusted EPS surged 159%.

For fiscal 2024, it expects its revenue to rise 31%, even as macro headwinds make it tougher for many cybersecurity companies to lock in new customers. During its latest conference call, CEO Jay Chaudhry said Zscaler wasn’t experiencing any “significant pressure” on its big deals, and that the market’s demand for cybersecurity products was still “strong” as zero trust remained a “top priority” for many companies.

Zscaler has been ramping up its spending on new marketing and research and development (R&D) efforts, but it still expects its adjusted operating margin to rise to a midpoint of 18.8% for fiscal 2024 while its adjusted EPS increases 53%-55%. Those estimates are impressive, and its stock still doesn’t seem terribly expensive at 57 times forward earnings.

Zscaler isn’t profitable on a generally accepted accounting principles (GAAP) basis yet, but it’s consistently narrowing its net losses and it ended its latest quarter with $2.5 billion in cash, cash equivalents, and marketable securities, so it still has plenty of liquidity to expand its booming business.

Fortinet faces tougher near-term challenges

In 2023, Fortinet’s revenue rose 20% to $5.3 billion, its adjusted operating margin expanded from 27% to 28%, and its adjusted EPS jumped 37%. Those growth rates suggested it could still achieve its goal of generating $8 billion in annual revenue in 2025, which would represent a compound annual growth rate (CAGR) of 23% from 2023.

Unfortunately, Fortinet extinguished those hopes with its grim outlook for 2024. It expects its revenue to increase a mere 8%-10%, its adjusted operating margin to shrink to a midpoint of 26.5%, and its adjusted EPS to climb 1%-4%. That’s an anemic growth rate for a stock that trades at 42 times forward earnings.

Fortinet blamed that slowdown on macro headwinds, slower spending on cybersecurity appliances after a temporary acceleration in 2022 (in response to the supply chain constraints of 2021), and the cooling upgrade cycle for next-gen firewalls. It also didn’t reiterate its $8 billion goal in its latest conference call.

Meanwhile, Fortinet continues to ramp up its spending on its own proprietary chips, which it claims can tackle threats more efficiently than off-the-shelf chips when paired with its own hardware and software. That combination of slowing growth and rising expenses spooked investors, but the company is still firmly profitable on a GAAP basis, and held $2.4 billion in cash, cash equivalents, and marketable securities at the end of 2023.

The better buy: Zscaler

Zscaler looks pricier than Fortinet, but it’s still the better buy right now. It’s a more focused play on the zero-trust market, it’s growing faster, its operating margins are expanding, and it seems nearly impervious to the macro headwinds. Its cloud-native approach is also easier to scale than Fortinet’s hybrid mix of appliances and cloud services.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Fortinet and Zscaler. The Motley Fool has a disclosure policy.

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