In the past, most cybersecurity companies installed on-site appliances to run their services. However, those appliances were expensive, took up a lot of space, and didn't scale well with a growing business.
Those shortcomings paved the way for a new breed of cloud-native cybersecurity services that didn't require any on-site appliances. Two of the most well-known players in this disruptive niche are Zscaler (ZS 2.53%) and CrowdStrike (CRWD +0.77%).
Image source: Getty Images.
Zscaler's cloud-native "zero trust" services treat everyone -- including an organization's most trusted employees -- as potential threats. It mainly focuses on securing a company's internal and web-based traffic with those rigid controls. CrowdStrike's cloud-native Falcon platform provides constant protection for endpoint devices like servers, PCs, and mobile devices.
Both stocks have skyrocketed since their initial public offerings (IPO). Zscaler went public at $16 per share in 2018, and it now trades in the $230s. CrowdStrike priced its IPO at $34 in 2019, and it now trades in the $220s. Should investors consider buying either high-flying cybersecurity stock right now?
How fast is Zscaler growing?
Zscaler served about 2,800 customers, including 10% of the Forbes Global 2000, at the time of its IPO. Today, it serves roughly 5,600 customers, including a quarter of the Global 2000. It's also gaining larger clients -- 251 of its customers generated over $1 million in annual recurring revenue (ARR) at the end of its latest quarter, which represented 85% growth from a year ago.
NASDAQ: ZS
Key Data Points
Revenue rose 42% in fiscal 2020, ended July 31, and increased 56% in FY 2021, and grew 62% year-over-year in the first six months of fiscal 2022. It expects its revenue to climb about 56% to $1.05 billion for the full year.
The company's dollar-based net retention rate, which gauges its year-over-year revenue growth per existing customer, has also stayed above 125% over the past four quarters. That stickiness indicates it's successfully "landing and expanding" by cross-selling additional services.
Zscaler's adjusted gross margins have consistently remained above 80% ever since its public debut, and its adjusted operating margins have remained positive over the past 3 1/2 years. It isn't profitable based on a generally accepted accounting principles (GAAP) yet, but it's been profitable on a non-GAAP basis ever since fiscal 2019.
Its non-GAAP earnings per share (EPS) rose 9% in fiscal 2020 and jumped 73% in 2021, and it expects about 6% growth this year.
How fast is CrowdStrike growing?
At the time of its public debut, CrowdStrike served 2,516 customers. It ended this January with 16,325 subscription customers, which represented 65% growth from a year earlier.
NASDAQ: CRWD
Key Data Points
Its dollar-based retention rate has remained comfortably above 120% ever since its public debut, and its existing costumers continue to use more of its cloud-based modules. Last quarter, it pointed out that 57% of its customers were using five or more of its modules, compared to 47% a year earlier.
CrowdStrike's revenue rose 93% in fiscal 2020, ended Jan. 31, 82% in FY 2021, and 66% to $1.45 billion in FY 2022. It expects revenue to rise about 48% to $2.15 billion this year. Its subscription gross margins have also remained near 80% ever since its IPO.
CrowdStrike is still unprofitable on a GAAP basis, but its non-GAAP operating margins turned positive in fiscal 2021 and doubled to 14% in fiscal 2022. As a result, the company turned profitable on a non-GAAP basis in fiscal 2021, with a profit of $0.27 per share. Its non-GAAP EPS rose another 148% in fiscal 2022, and it expects 61% growth this year.
The valuations and verdict
Zscaler and CrowdStrike's growth rates look comparable, but the former is much pricier than the latter. Zscaler trades at more than 400 times forward non-GAAP earnings and 32 times this year's sales. CrowdStrike trades at about 200 times non-GAAP forward earnings and 24 times this year's sales.
Zscaler's debt-to-equity ratio of 3.5 is also much higher than CrowdStrike's ratio of 2.5. That higher leverage could make it a less appealing investment as rising interest rates boost borrowing costs.
Based on these facts, I believe CrowdStrike is the better all-around investment in this challenging market. It's still a risky stock to own as the macro headwinds slam growth stocks, but its fundamental strengths should limit its downside potential.
