Fortinet vs. Zscaler: Which Cybersecurity Stock is the Superior Investment?

In the ever-evolving realm of cybersecurity, investors are closely examining two prominent stocks: Fortinet (NASDAQ: FTNT) and Zscaler (NASDAQ: ZS). Each represents a unique approach to safeguarding digital assets; Fortinet leans on an extensive suite of security products, while Zscaler champions a nimble, cloud-native “zero trust” paradigm.

Short Summary:

• Fortinet, a well-established player, focuses on comprehensive endpoint security solutions.
• Zscaler specializes in zero trust security through cloud-native services, fostering rapid growth.
• Market analysts forecast differing growth trajectories and potential returns, suggesting distinct investment merits.

Introduction to Fortinet and Zscaler

As one of the leading stocks in the cybersecurity landscape, Fortinet provides an array of endpoint security measures that work across on-premises, cloud, and Internet of Things (IoT) devices. In contrast, Zscaler captures market attention with its rapidly growing zero trust services model, a methodology that treats all users, including high-ranking executives, as potential threats. The stock performance of both companies over the last year reveals Fortinet’s stock has climbed 26%, while Zscaler’s saw a slight downturn of 1%. This article delves into the factors contributing to Fortinet’s strong performance compared to Zscaler, assessing which stock could be a superior investment option.

Key Differentiators Between Fortinet and Zscaler

Fortinet’s origins trace back to the development of next-gen firewalls (NGFWs), enhancing traditional firewall capabilities with sophisticated filtering tools. These advancements laid the groundwork for its “Security Fabric,” uniting over 50 security services in both on-premises and cloud-based formats to cater to a wide consumer base of over 775,000 organizations globally.

In contrast, Zscaler, without the need for heavy on-site appliances that can be costly and space-consuming, opts for a subscription-based model utilizing its zero trust tools, enabling easier scaling and continuous online updates. This flexibility has allowed Zscaler to onboard over 7,700 clients, including a significant portion of the Forbes Global 2000 companies, underscoring its rapid scalability.

Comparative Growth Rates

Fortinet has exhibited significant revenue growth since its IPO in 2009, with a compound annual growth rate (CAGR) of 24% from 2009 to 2019, transitioning to 25% from 2019 to 2023, which saw revenue soar from $2.2 billion to $5.3 billion. However, the outlook for 2024 forecasts a deceleration in growth to just 9% to 11%, indicating the slowest growth rate since its public debut.

Conversely, Zscaler has emerged as a potent competitor in the cybersecurity market, with fiscal 2023 revenue growth accelerating by 48% to reach $1.62 billion. Its projections for fiscal 2024 anticipate a revenue increase of 31%, a figure that demonstrates strong resilience despite macroeconomic pressures affecting many cybersecurity firms.

Market Forces Affecting Growth

The cybersecurity landscape is influenced by an array of factors, including rapid digital transformation, cloud adoption, geopolitical uncertainties, and an increasing focus on artificial intelligence (AI) technologies. However, companies, including Fortinet and Zscaler, face headwinds stemming from heightened competition and restrained enterprise spending resulting from widespread economic uncertainties.

“The market demand for cybersecurity products remains strong, with zero trust being a top priority for many organizations,” stated Zscaler’s CEO, Jay Chaudhry.

Zscaler’s Performance Amidst Competitive Pressures

Despite challenges, Zscaler’s recent fiscal second-quarter report revealed billings that surpassed expectations, growing by 27% year-over-year. Furthermore, it successfully acquired 112 customers generating $100,000 in annual recurring revenue (ARR), bolstering its total count to 2,820.

However, investor sentiment turned cautiously pessimistic as Zscaler’s revenue growth rate began to decelerate, a trend underscored by competitive commentary from peers such as Palo Alto Networks (NASDAQ: PANW). The latter company’s remarks regarding decreased client spending raised concerns across the cybersecurity sector.

Investment Sentiment on Zscaler

Analysts remain optimistic about Zscaler’s long-term growth potential. Jefferies analyst Joseph Gallo recently reiterated a ‘Buy’ rating, stipulating a price target of $275 for Zscaler stocks. Gallo remarked that despite competition in the Secure Access Service Edge (SASE) space, Zscaler retains a “pole position” within this nascent market, estimating a $60 billion total addressable market (TAM) for 2023, poised to expand to $105 billion by 2028.

Zscaler’s strong consensus rating—25 Buys and five Holds—points to a promising outlook, with an average stock price target indicative of nearly 48% upside potential.

Fortinet’s Current Prospects and Analyst Ratings

Recently reported earnings outlined a mixed scenario for Fortinet. Although it reported a 7% revenue uptick to $1.35 billion for the first quarter of 2024, adjusted EPS surged 26.5% year-over-year to $0.43, figures were undercut by a significant drop in billings by 6.4%. Analysts expressed concerns regarding future prospects as the midpoint guidance for Q2 2024 hinted at further declines.

Despite these setbacks, Morgan Stanley analyst Hamza Fodderwala maintained a ‘Buy’ rating on Fortinet, lowering the price target to $73 from $81. Fodderwala commented that while recovery appears slower than earlier anticipated, he believes that the latest quarter may mark the trough in Fortinet’s performance.

Palo Alto Networks: A Comparative Analysis

Palo Alto Networks has faced its share of challenges as well, dropping its full-year guidance and citing slow revenue growth. Their ambitious strategy hinges on platformization and leveraging AI technologies to fortify market position. Analyst sentiments surrounding Palo Alto remain cautious but optimistic, with a consensus rating of ‘Moderate Buy’ that features 29 buys and 10 holds.

“We’re optimistic about Palo Alto’s long-term leadership in the cybersecurity space,” stated market analyst Peter Levine regarding the firm.

Wall Street’s Outlook: Zscaler vs. Fortinet

As Wall Street perceives a bullish sentiment surrounding Zscaler compared to cautious optimism regarding Fortinet, analysts advocate for Zscaler primarily based on its robust growth in essential metrics and an extensive addressable market. The recent pullback in Zscaler stock is seen as an opportune entry point for investors.

Cybersecurity Market Trends and Future Outlook

The broader cybersecurity sector stands to gain from persistent threats and modern requirements for secure digital infrastructure. With projections estimating that global cybercrime damage could hit $10.5 trillion annually by 2025, demand for effective security solutions appears more crucial than ever.

Furthermore, according to analysts from Bank of America, the growth of the Cloud Native Application Protection Platform (CNAPP) market, forecasted to rise from $7.2 billion in 2023 to $16.3 billion by 2027, will accelerate investment across numerous cybersecurity solutions. This backdrop offers favorable conditions for both Fortinet and Zscaler to innovate and expand.

Conclusion: Making the Right Investment Choice

The analysis between Fortinet and Zscaler brings forth distinctive investment perspectives. While Fortinet showcases long-established operations within diverse security frameworks, Zscaler’s agile, cloud-based offerings and focus on zero trust demonstrate its growth potential. With macro challenges impacting both firms, Zscaler appears poised for higher upside opportunities, while Fortinet seeks to stabilize its growth trajectory amidst competitive pressures. Ultimately, the choice between these two stocks hinges on appreciation for innovation and growth versus would-be stability in a tumultuous market.