Analyzing Fortinet vs Zscaler in the Cybersecurity Arena

Understanding Fortinet and Zscaler in Cybersecurity

Fortinet (NASDAQ: FTNT) and Zscaler (NASDAQ: ZS) offer unique approaches to capitalize on the rapid growth of the cybersecurity market. With an extensive suite of endpoint security solutions covering on-premises, cloud-based environments, and the Internet of Things (IoT), Fortinet is a well-established contender. Conversely, Zscaler focuses on delivering agile, cloud-native "zero trust" services, treating all users, regardless of status, as potential threats.

Over the past year, Fortinet's stock surged by 26%, while Zscaler faced a slight decline of 1%. This stark difference raises an important question: why did Fortinet outperform Zscaler, and is it still the superior investment choice?

Key Differences in Offerings

Fortinet initially introduced next-gen firewalls (NGFWs) that enhanced conventional firewall capabilities with sophisticated network-filtering tools. This technology became the backbone of its "Security Fabric," an integrated suite of over 50 services tailored for both on-premises and cloud environments. With a vast customer base exceeding 775,000 globally, Fortinet has established itself as a leader in the industry.

Distinctively, Zscaler opts against providing on-site appliances—these are costly and cumbersome. Instead, Zscaler offers its zero trust tools strictly through subscription-based cloud-native services that are progressively updated and scalable. With a customer base of over 7,700, including a significant portion of the prestigious Forbes Global 2000 companies, Zscaler continues to maintain a strong presence in the market.

Evaluating Growth Rates

Since its public debut in 2009, Fortinet has experienced impressive growth, achieving a compound annual growth rate (CAGR) of 24% from 2009 to 2019. This growth accelerated to 25% in recent years, elevating its revenue from $2.2 billion to $5.3 billion. Yet, projections indicate a slowdown, with expected revenue growth of only 9% to 11% in the coming year, potentially reaching $5.8 billion to $5.9 billion.

Despite these projections, Fortinet attributes this slowdown to various macroeconomic challenges, diminished spending on security appliances following a temporary boom in 2022, and a cooling cycle for NGFW upgrades. Additionally, stiff competition from rivals like Palo Alto Networks (NASDAQ: PANW) and CrowdStrike (NASDAQ: CRWD) is complicating Fortinet's market strategy.

Conversely, Zscaler was launched in 2018 and achieved a remarkable CAGR of 48% between fiscal 2019 and 2024. This robust performance is largely due to the increased demand for zero-trust solutions amidst growing cybersecurity threats. For fiscal 2025, Zscaler anticipates a revenue increase of 20% to 21%, reflecting its slowest growth since becoming public.

Investment Potential: Fortinet vs Zscaler

When compared, Fortinet’s larger scale, wider service range, and more favorable valuation make it a compelling investment. While Zscaler's rapid growth is noteworthy, its profitability hinges on non-GAAP earnings, as it must account for substantial stock-based compensation expenses.

Fortinet's consistent performance in profitability, alongside its proactive approach to expanding chip technology, positions it favorably for future growth. Analysts expect Fortinet's adjusted earnings per share (EPS) to grow by 25% in 2024, although this is forecasted to slow to 10% by 2025. Despite a valuation of 33 times forward earnings, Fortinet’s stock appears to be a more stable investment compared to its rival.

In contrast, Zscaler’s aggressive pricing strategies in a challenging environment are leading to projected declines in adjusted earnings for 2025. With its stock currently priced at $157 per share and a high valuation factor of 55 times expected earnings, potential investors may find Fortinet to be the more attractive option.

Final Thoughts on Investing

Ultimately, while Zscaler has demonstrated impressive growth, Fortinet offers a more diversified portfolio and a stronger financial foundation. For investors weighing the potential of a $1,000 investment, Fortinet may represent a more reliable avenue for growth considering its established market presence and ongoing profitability.

Frequently Asked Questions

What are the main differences between Fortinet and Zscaler?

Fortinet offers a comprehensive range of physical and cloud-based security solutions, while Zscaler focuses solely on cloud-native, subscription-based zero trust models.

How have stock performances of Fortinet and Zscaler differed?

Fortinet’s stock rose 26% over the last year, whereas Zscaler’s stock fell by 1%, reflecting a significant performance gap.

What is the future growth outlook for Fortinet?

Fortinet expects slower growth in the coming years, estimating a revenue increase of 9% to 11%, reaching about $5.9 billion.

Is Zscaler still a strong investment option?

While Zscaler continues to grow, its slower growth rate and high valuation might make it less appealing compared to Fortinet.

What factors should investors consider when investing in cybersecurity stocks?

Investors should evaluate revenue growth, profitability, market competition, and overall service diversification when choosing cybersecurity stocks.

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