Z scaler (ZS 0.73%) and fortinet (FTNT 2.43%) Although both are major cybersecurity companies, they operate with very different business models. Zscaler specializes in “zero trust” services that treat everyone, including a company's CEO, as a potential threat. Instead of installing cumbersome appliances, we offer all tools as cloud-native services. This is easier and easier to scale as your company grows.
Fortinet is an older, larger, and more diversified cybersecurity specialist that uses a combination of on-site appliances and cloud-based services to protect organizations. The company originally developed a next-generation firewall and has since expanded its ecosystem into a “security fabric” that provides end-to-end cybersecurity services for on-premises, cloud-based, and Internet of Things (IoT) devices. We differentiate ourselves from many other cybersecurity companies by developing our own chips.
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Over the past 12 months, Zscaler's stock price has risen 65%, while Fortinet's stock has only risen 5%. Let's take a look at why the former outperformed the latter by such a large margin, and whether it's still the better buy.
Zscaler continues to grow in challenging markets
In fiscal 2023 (ending last July), Zscaler's revenue increased 48% to $1.62 billion, adjusted operating margin expanded from 10% to 15%, and adjusted EPS jumped 159%. .
The company expects revenue to increase 31% in fiscal 2024, even as macro headwinds make it more difficult for many cybersecurity companies to retain new customers. In the latest conference call, CEO Jay Chaudhry said Zscaler was not under “significant pressure” regarding large deals and that zero trust remained “a top priority” for many companies. ”, market demand for cybersecurity products remains “strong”. .
Zscaler is increasing spending on new marketing and research and development (R&D), but expects adjusted operating margin to rise to the midpoint of 18.8% and adjusted EPS to increase 53% to 55% in fiscal 2024. are doing. These estimates are impressive, and at a forward P/E ratio of 57 times, the stock still doesn't seem overvalued.
Although Zscaler is not yet profitable on a generally accepted accounting principles (GAAP) basis, its net loss has been consistently narrowing, with $2.5 billion in cash, cash equivalents and securities in the latest quarter. There is still plenty of liquidity since the company ended the transaction as a holding. To expand a fast-growing business.
Fortinet faces even tougher challenges in the short term
In 2023, Fortinet's revenue increased 20% to $5.3 billion, adjusted operating margin expanded from 27% to 28%, and adjusted EPS increased 37%. These growth rates suggest that the company can still achieve its goal of generating $8 billion in annual sales in 2025, which would represent a compound annual growth rate (CAGR) of 23% from 2023.
Unfortunately, Fortinet shot down those hopes with a grim outlook for 2024. He expects sales to increase by just 8% to 10%, adjusted operating margin to shrink to a mid-range 26.5%, and adjusted EPS to increase by his 1% to 4%. %. That's a poor growth rate for a stock trading at 42 times forward earnings.
Fortinet attributes this slowdown to macro headwinds, a slowdown in spending on cybersecurity appliances after briefly accelerating in 2022 (in response to supply chain constraints in 2021), and next-generation This is attributed to a slowdown in the firewall upgrade cycle. Nor did he reiterate the $8 billion goal during the latest conference call.
Meanwhile, Fortinet continues to increase spending on its own chips, which it claims can be combined with its own hardware and software to deal with threats more efficiently than off-the-shelf chips. Although the combination of slower growth and higher expenses scared investors, the company remains solidly profitable on a GAAP basis, with $2.4 billion in cash, cash equivalents, and marketable securities at the end of 2023. was in possession.
Better Buy: Zscaler
Zscaler seems more expensive than Fortinet, but it's still a better buy at this point. This is a strategy more focused on the zero trust market, which is growing rapidly, operating margins are expanding, and appears to be largely immune to macro headwinds. A cloud-native approach is easier to scale than Fortinet's hybrid mix of appliances and cloud services.
Leo Sun has no position in any stocks mentioned. The Motley Fool has a position in Fortinet and Zscaler and recommends Fortinet and Zscaler. The Motley Fool has a disclosure policy.
