Zscaler vs. Fortinet: Which Cybersecurity Stock Is Better?

Zscaler (NASDAQ: ZS) and Fortinet (NASDAQ: FTNT) are leading cybersecurity companies with differing business approaches. Zscaler offers "zero trust" services that view everyone, including CEOs, as a threat. It offers all its tools as cloud-native services, which are stickier and easier to scale as a firm expands than clunky hardware.  

Fortinet, an older, larger, and more diverse cybersecurity company, defends enterprises with on-site hardware and cloud services. It started with next-gen firewalls and now offers end-to-end cybersecurity services for on-premise, cloud, and IoT devices in its "Security Fabric" ecosystem. Its own processors set it apart from other cybersecurity organizations.  

Zscaler's stock grew 65% in a year, whereas Fortinet's rose 5%. Let's analyze why the former outperformed the later so much and if it's still better.  

Zscaler is growing in a tough market. Zscaler's sales climbed 48% to $1.62 billion in fiscal 2023 (which ended last July), its adjusted operating margin rose from 10% to 15%, and its adjusted EPS rose 159%.  

It anticipates revenue to climb 31% in fiscal 2024, despite economic challenges making it harder for cybersecurity companies to attract new customers. CEO Jay Chaudhry stated in its latest conference call that Zscaler wasn't under "significant pressure" on its big agreements and that cybersecurity solutions were still "strong" because zero trust was a "top priority" for many firms.  

Zscaler has increased its marketing and R&D spending, but it still anticipates its adjusted operating margin to expand to 18.8% and its adjusted EPS to reach 53%-55% for fiscal 2024. These projections are strong, and its stock isn't costly at 57 times forward earnings.  

Although Zscaler isn't profitable under GAAP, it's consistently narrowing its net losses and ended its latest quarter with $2.5 billion in cash, cash equivalents, and marketable securities, giving it plenty of liquidity to grow its booming business.  

Fortinet faces harsher short-term problems. Fortinet's sales climbed 20% to $5.3 billion, adjusted operating margin rose from 27% to 28%, and adjusted EPS rose 37% in 2023. Those growth projections suggested it may still reach its goal of $8 billion in yearly revenue in 2025, a 23% CAGR from 2023.  

Unfortunately, Fortinet's 2024 projection dashed those dreams. Revenue is expected to rise 8%-10%, adjusted operating margin to drop to 26.5%, and adjusted EPS to rise 1%-4%. A stock trading at 42 times forward earnings has weak growth. Fortinet attributed the decrease to macro challenges, slower cybersecurity appliance investment following a transitory spike in 2022 due to 2021 supply chain restrictions, and the next-gen firewall cooling upgrade cycle. Its latest conference call didn't mention its $8 billion aim.  

Fortinet is spending more on its custom processors, which it claims can fight threats better than off-the-shelf chips when combined with its gear and software. Investors were alarmed by slowed growth and increased expenses, but the company was still profitable on a GAAP basis and had $2.4 billion in cash, cash equivalents, and marketable securities at the end of 2023.  

Better buy: Zscaler Though more expensive than Fortinet, Zscaler is now the superior buy. It's focused on the zero-trust market, growing faster, boosting operational margins, and seemingly immune to economic challenges. Scaling is easier with its cloud-native approach than Fortinet's hybrid appliances-cloud services method.  

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